Recession Proof Your Portfolio With Auto Parts? Ted Bauman Believes You Can.

Ted Bauman’s career has taken him across continents, professions and cultures. An economist by training, Bauman spent the early part of his career in South Africa, helping to guide the transition from the apartheid government to a new future for the so-called Rainbow Nation.

Ted Bauman’s work proved instrumental although many of the policies that he recommended and that proved so successful in the immediate handoff to the African National Congress were eventually abandoned. However, the experience showed Ted Bauman that sound economics could indeed make a deep positive impact on the lives of everyday people.

Eventually, this desire to help real people, rather than government elites and the super-rich, led Ted Bauman in the direction of becoming a personal financial advisor to thousands. Today, he is the author of a number of well-regarded newsletters, including Alpha Stock Alert and The Bauman Letter. He has helped people reap millions in the stock market since the early 2000s and, more importantly, has provided everyday investors with the tools that they need to successfully hedge their portfolios against risk using some of the same, highly effective strategies that are used by the worlds largest and most-sophisticated investors.

Used Cars May Drive Auto Part Stocks

The key to hedging a portfolio is to find assets that will not just hold their value but that will actually outperform as a direct consequence of either a general market downturn or a negative price swing in either a particular asset or an asset class. When it comes to the U.S. stock market as a whole, Bauman says that there is one sector that is often overlooked by serious hedgers: auto-part stocks.

While this effect has been somewhat well known among investment professionals, Bauman believes that there are a number of factors that are poised to turbocharge the inverse correlation between general asset prices and auto-part stocks. And this, he says, will almost certainly manifest itself in the next major downturn.

Loose Credit and Changing Demographics

There are a few unique circumstances that have existed since the crash of 2008 that have made the intervening 11 years one of the auto industry’s best on record. Record-low interest rates have meant that automakers have found little resistance in moving brand-new cars off their dealerships’ lots. This has kept the supply of new cars sky high. And the loose lending standards as well as the abundance in supply has trickled down to the certified-used-car market, which typically consists of vehicles that are around three to five years old, many of which are in effectively like-new condition.

All this has meant that Americans have been driving newer cars in greater numbers than almost any time in history. And because few people have any trouble securing a newer and ultra-reliable form of transportation, this has led to fewer people doing everything they can to keep their old cars on the road.

The Pareto Principle

Unsurprisingly, brand new cars that are built with state-of-the-art designs, using cutting-edge materials and brand-new parts, tend not to require a great deal of maintenance, especially that involving the replacement of parts. Additionally, most new cars now carry warranties that extend to at least three years or 36,000 miles. And many certified-used cars will even come with warranties. All this adds up to significantly less demand for aftermarket auto parts as these newer and reliable vehicles tend to require very few replacement parts even of highly wearable items like brake, steering and drivetrain components.

But cars over a decade old are the mirror image of this situation. It can be safely said that the oldest 20 percent of vehicles on the road require at least 80 percent of the aftermarket replacement parts. This is due to the simple fact that, even on the best maintained vehicles, things like brake pads, rotors, CV joints and heater cores will eventually need to be replaced. And the real wear and tear that newer cars are so good at masking early in their life cycles really start to appear after around the 100,000-mile mark or 10 years on the road.

The Return to Deep Used Vehicles

But despite these powerful tailwinds, which have propelled the U.S. auto industry to sell more nearly 150,000,000 new cars since 2008, the U.S. auto industry is about to face a reckoning.

For starters, consumers are increasingly tapped out. Consumer auto debt is currently pushing $1.5 trillion. And, for reasons that are beyond the scope of this article but that are nearly certain, interest rates are going to begin rising. And they could easily rise all the way to double digits. With many consumers already well past their optimal debt-saturation levels, tens of millions of Americans will find in the next decade that they are simply no longer able to secure financing for new or even slightly used vehicles.

Additionally, the United States continues to see its Hispanic population grow. This is a demographic that has traditionally been heavily reliant on do-it-yourself auto repairs, in some regions, single-handedly driving virtually the entire junkyard and aftermarket auto-parts sectors. This trend is expected to continue.

Because the entire new-car auto industry is hyper-reliant on easy credit and a population that is conditioned to viewing new and newer cars as an unquestioned good, when that pool of credit and consumers dries up, there will be a serious crash in new-car sales. It is an almost-certain bet that the next decade will see an exodus of drivers from the new and certified-used markets down into the deep-used markets where vehicles that have been on the road 10, 15 and even 20 years lurk. And keeping these vehicles on the road, although ultimately saving massively in capital expenditures for the average person, will require a ramp up in aftermarket parts manufacturing and sales that is poised to dwarf anything seen to date.

The Aftermarket Affect of Returning to Old Cars

Ted Bauman predicts that the impending so-called carpocalypse will precipitate an explosion in the aftermarket-parts industry of a magnitude that has never before been witnessed. Bauman says that now is the time to get in on the ground level, selecting the best-positioned auto-parts stocks before these factors get priced in by the greater share of investors.

If the trend towards macroeconomic and demographic factors that favor much older used cars continues, Bauman says that auto-parts stocks could prove to be one of the few sources of genuine capital growth over the next decade.

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