We are celebrating the National Day and Mid Autumn Festival, with the US stock market continuing to hit new highs, BTC also hitting new highs, and gold hitting new highs. It seems like everything is going smoothly, but something happened these past few days. Although there may not be much news coverage, it is very important. Two American car related companies have gone bankrupt! One is called FirstBrands, the other is Tricolor, and there are quite a few investment banks involved, including UBS America, JPMorgan Chase, etc. Although the amount is not huge, it is thriving and some strange events are happening! We have previously mentioned that the default rate for US car loans exceeding 90 days has reached a new high of 5%, similar to the pandemic lockdown period and the 2008 financial crisis. And automobile consumption, besides housing, is the largest personal consumption. We should know that the United States is a country supported by consumption. At this moment, the collapse of these two companies is likely a signal of the undercurrent in the US financial system. one ️⃣ Let's talk about what these two companies do first! Tricolor， This company is engaged in the second-hand car business and is one of the top ten second-hand car retailers in the United States, operating 65 retail centers. Established in 2007, it has received two rounds of financing with a total financing of over 130 million US dollars, including participation from investment banks such as BlackRock and JPMorgan Chase. Its business model is also very unique, Tricolor is not an ordinary car seller. It specializes in selling cars to people with poor credit and special status, such as illegal immigrants and low-income groups. Its routine is very simple: Sell cheap cars, such as for thousands to ten thousand dollars; Paired with a high interest loan with an annual interest rate of up to 20%. These customers generally cannot buy cars with cash and can only rely on loans, and Tricolor makes money from this high interest rate. Does this sound a bit like the subprime mortgage model of 2008? ——Yes, the subprime car version. And another company, FirstBrands, has a long history dating back to the 1980s, with 112 independent subsidiaries under its umbrella. Its core business mainly focuses on being a leading supplier of components for the global automotive aftermarket. Its products mainly enter the secondary market through retail stores, wholesalers, and independent repair shops to serve vehicle maintenance and repair needs. The main products include the following brands, which dominate their respective automotive segments: Filtration system: Fram filter and Champion Laboratories (Champ Labs) • Braking system: Raybestos brake pads, Centric Parts, and StopTech • Ignition and vision system: Autolite spark plugs and Trico wipers The bankruptcy of FirstBrands, as a major automotive parts supplier and an upstream link in the entire automotive industry chain, may lead to a significant reduction in the selection of parts in the US automotive aftermarket, and may even push up repair prices, ultimately affecting consumers and exacerbating the decline of automotive consumption. two ️⃣ The logic behind FirstBrands' downfall: the explosion of off balance sheet financing This company has been borrowing money in two ways: 1. Inventory loan: using inventory as collateral to borrow money; 2. Invoice financing: pledging future receivables as collateral. This approach may seem smart and can generate cash flow in the short term, but if your customers pay slowly and inventory cannot be sold, these debts will immediately become bombs. What's even more outrageous is that this kind of debt is not even included in the balance sheet. It's like you owe a lot of debt, but on paper you look healthy. One day, when all the creditors came knocking on your door, you realized: Oh my, I've already gone bankrupt. Later, it was discovered that First Brands' off balance sheet debt exceeded $10 billion. At this point, investors were stunned - yesterday they were rated AAA, but today they jumped straight to CC. Bond prices fell from $1 to 1 cent in a day, plummeting by 99%. Is this scene familiar? Yes, it's a bit like a replica of Lehman Brothers in 2008. Back then, a pile of AAA bonds turned into worthless paper. three ️⃣ The Fall of Tricolor: The True Fault in American Consumption Let's talk about Tricolor. It is actually a "barometer of life" for ordinary Americans. Think about it, the two most important consumer expenditures for Americans are houses and cars. The interest rate on a house is so high that it's unaffordable, so a car has become the 'last frontier for consumption'. What was the result? Tricolor went bankrupt, and CarMax (the largest used car company in the United States) saw its profits plummet by 40% this year, causing its stock price to plummet. Explain what? The purchasing power of lower tier consumers in the United States is completely unsustainable. As mentioned at the beginning, the proportion of car loans in the United States that are overdue for more than 90 days has exceeded 5% and is now hovering around the red alert line, with many ordinary people unable to even repay their car loans. As a 'country on wheels', the United States has a strong demand for cars. If you even cut off car loans, it means that the entire consumer system may be in trouble. four ️⃣ Why did these two companies go bankrupt and raise concerns I think the scary thing about these two bankruptcies is their symbolic significance. Firstly, they represent the breakpoint of American consumption. When ordinary people can no longer afford to buy a car, it will be the beginning of a shaky consumer system. In addition, they represent the breaking points of the financing chain. Over the past few years, too many companies have been using off balance sheet financing, private equity bonds, and bill collateralization. Once the first one hits the jackpot and private equity firms begin to review and shrink their funds, the liquidity of the entire chain will be drained, which can easily trigger a domino effect. Finally, their downfall is very similar to the prelude of 2007. Back then, it also started with small companies and small mortgage lending institutions, and a series of domino effects eventually ignited Lehman Brothers AIG、 Wall Street. To put it simply, the current situation is that the earth's crust is moving, volcanoes are erupting, and everyone is still singing and dancing. But the temperature underground is actually rising, so at this moment, when the music and dance are calm, we should calmly observe every move of the market, be cautious and cautious, as if walking on thin ice. Even a wrong step could become 'mountaintop capital'. Finally, let me share my personal opinion. First of all, I am not criticizing the United States, but rather looking at the essence from a superficial perspective. Although various signs indicate that it is still too early to break point, especially in this round of AI supported corporate profits, which can indeed support the entire booming US stock bull market. But there are also a few signals to be wary of: The consumer end has already been overdrawn. The American model of living on credit has reached its limit. • High off balance sheet debt risk. Many companies are playing the 'look healthy' financial game. Interest rates have been high for too long. It is only a matter of time before long-term high interest rates cause the cash flow of many small and medium-sized enterprises to collapse. The valuation of US stocks is outrageous. Even Powell is warning of 'overvalued stocks'. In the short term, the market may still maintain a "beautiful bubble boom" - as AI, technology stocks, and buybacks support the index. But the cracks in the underlying economy have begun to emerge. So in terms of investment strategy, I always advise my fans to follow the three no's principle: no leverage, no playing with contracts, and no borrowing money. Now add: 'Don't chase high, focus on liquidity!' The bankruptcy of these two car companies may just be the prologue, and the real crisis often begins with small news that nobody pays attention to, just like the BlackRock Q4 investment strategy outlook we introduced earlier, which mentioned that 'living in the present is more important'.