The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.
Ever since President Trump trotted out that giant poster board on Liberation Day, there have been two competing narratives over how this would turn out. Economists have warned that the tariffs, which ranged from 15% to 50%, would ultimately be paid by consumers. The White House, on the other hand, has insisted that tariffs are basically free money for the government and that they would lower prices by bringing foreign investment back into the US.
Serious investors never believed that overly rosy view of the trade war, but they’ve been mystified by an American stock market that seemed to defy gravity. Tariffs have made imports a lot costlier. Yet headline inflation as measured by the CPI has only risen modestly to about 2.9%.
Well, now some of the serious impacts are starting to be felt, specifically for new cars.
The average price customers paid for a new vehicle in the US was $50,080 in September, a reflection in part of the steadily rising prices in the wake of automotive tariffs.
Auto tariffs have an especially big impact on sticker prices, since car supply chains were designed to cross the borders between the US, Canada, and Mexico multiple times before the final product gets assembled, and now with auto tariffs hitting every time a part changes countries, those duties quickly add up. An entry level car used to cost about $20,000, and now, auto analysts are calling the $20,000 car “extinct.”
But the worrying news doesn’t stop there. Buyers have reacted to this new reality by going into debt, and those with shittier credit have turned to sub-prime lenders to finance their purchases.
Yuh-oh.
If the term “sub-prime” sends a shiver up your spine, you’re not alone. It wasn’t that long ago that sub-prime mortgages brought the US economy, and with it the global financial system, to the brink of collapse. Shifty lenders giving money to people with no jobs to buy houses they couldn’t afford went bankrupt, and the impact of these bad loans was so widespread that pension funds, retirement accounts, and even other countries’ governments were affected.
And now it’s starting to happen again.
Tricolor Holdings, a Dallas-based auto lender specializing in loans to borrowers with weak credit scores, went bankrupt in September.
The bankruptcy shines a spotlight on how millions of Americans are hurting from the high cost of living and sluggish job market. Cars are more expensive than ever, and more and more people are falling behind on their car loans.
Even JPMorgan, which prides itself on what Dimon has dubbed a “fortress balance sheet,” suffered $170 million in losses linked to the Tricolor bankruptcy, according to the company’s earnings call on Tuesday.
Why Jamie Dimon is warning of ‘cockroaches’ in the US economy, CNN
I must admit, sub-prime auto loans weren’t exactly on my 2025 Bingo card, but it all sounds eerily similar to what happened in 2008.
Nobody cares when some over-leveraged borrower loses their life savings, but when a whole bunch of them do it at once, the losses overwhelm the lender’s balance sheet and cause the company to go bankrupt. And because all these lenders are interconnected, losses in one lender spread to another lender, and so on and so on until the whole system collapses.
While it’s still too early to tell whether sub-prime auto loans can be contained or whether this will turn into the next financial contagion, the CEO of JP Morgan, Jamie Dimon, recently revealed how worried he was in an earnings call.
“My antenna goes up when things like that happen,” Dimon told analysts during a call on Tuesday. “And I probably shouldn’t say this, but when you see one cockroach, there are probably more… Everyone should be forewarned on this.”
Why Jamie Dimon is warning of ‘cockroaches’ in the US economy, CNN
So while I continue to hope that everything will turn out to be OK, we all have to prepare for the possibility that the economists were right, and that tariffs really are the bad idea they predicted in April.
So what can we do now to prepare?
Avoid Auto Loans Like the Plague
I hope that none of our readers would ever consider this, but auto loans are never a good idea. Cars are a depreciating asset. They lose about 10% of their value the minute they drive off the lot, and lose roughly 60% of their value within the first 5 years. So going into debt to own a car is like taking out a cash advance from a credit card to go to the casino. It might work out for you, but the vast majority of the time you’re just going to end up with empty pockets and a debt that’s steadily getting bigger over time.
Here’s a radical idea: If you can’t afford a new car, DON’T BUY A NEW CAR.
It’s a pretty simple principle that has served the FIRE community exceptionally well, and for some reason the general public has trouble grasping. Don’t get into debt for any reason.
Walk. Use public transit. Do the Mr. Money Mustache thing and try biking around town. Or if you absolutely need a car, buy one on the used market where tariffs don’t apply.
But don’t go out there and buy a new car using debt.
Stay Invested
In the face of scary headlines like this, it can be tempting to sell everything and move to cash until the dust settles, but that would be a huge mistake for two reasons.
One, even if I was 100% certain that a stock market collapse were coming, I have no idea exactly when that will happen. Hell, I thought the US would have entered a recession soon after the trade war started in April, and yet here we are. And remember, if you dance in and out of the market, you have to get both your exit and re-entry point right. That’s a pretty tall order. On the other hand, if you stay invested in the index long-term, all you have to do is wait and it will eventually recover from whatever downturn we’re heading into.
The second reason that it would be a bad idea to go to cash is that this particular financial meltdown that we’re heading into is likely to be caused by tariffs, which means inflation is going to play a starring role. And when inflation is high, cash is not a great place to be. Equities will be a much safer asset class when it comes to weathering inflation, because equities represent businesses, and businesses have the ability to counteract inflation by raising the prices they charge to their customers. In a rising inflationary environment, equities is the place to be.
And I know, I know, I recently took on a position in gold (which, incidentally, has risen 6% in the week or so since I made my buy), but as a speculative investment, I’m limiting my overall exposure to gold to just 5% of my portfolio. The vast majority of my investments will remain in equities.
Diversify Away from the USA
This year has been full of twists and turns, and somehow the USA has gone from the economic engine of the world to its biggest liability. At the time of this writing, the US index is up an impressive 13% YTD, mostly pulled up by tech companies profiting off expectations of the coming AI revolution, but it has been held back by politics.
During the same time period, the EAFE index, which comprises Europe, Australia and the Far East, is up a whopping 25%, despite a big scary war threatening Europe’s eastern flank. And Canada. CANADA, a country with the population of California, drenched in maple syrup and socialism, is up 21% YTD. Ironically, the inflation fears in the US that are pushing up gold prices are pushing up the Canadian stock market as well, since Canada mines a lot of gold.
If you’re American, consider investing outside your borders. I know that American investors are used to patriotically betting on their own country, but this might be a time in which that might not be the best idea. And that’s not just me saying that. Here’s JP Morgan’s chief global strategist in his own words:
There is a danger that political choices lead to a faster deterioration in the federal finances, leading to a backup in long-term interest rates and a lower dollar. Based on current allocations and valuations alone, many investors should likely consider diversifying their portfolios by adding alternative assets and international stocks. The risk that we move from going broke slowly to going broke quickly adds an important reason to make this move today.
Conclusion
What do you think? Is the world economy sliding into a new financial crisis, or do you think everything will turn out just fine? Let’s hear it in the comments below!
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we’re trying to do here, consider supporting us by clicking! Thx 😉
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Travel the World: Get flexible worldwide coverage for only $45.08 USD/month with SafetyWing Nomad Insurance
Multi-currency Travel Card: Get a multi-currency debit card when travelling to minimize forex fees! Read our review here, or Click here to get started!
Travel for Free with Home Exchange: Read Our Review or Click here to get started. Please use sponsor code kristy-d61e2 to get 250 bonus points (100 on completing home profile + 150 after first stay)!
