DANIEL RUIZ: We've had sequential declines in retail sales. Incentives aren't budging. We know that production is falling. I'm trying to wrap my head around what happens next.

DANIELLE DIMARTINO BOOTH: The irony of casting a light on General Motors to the extent that President Trump did is that it actually made things worse.

ASH BENNINGTON: Welcome to The Exchange. I'm Ash Bennington. Today, we're here with Danielle DiMartino Booth and Daniel Ruiz. We're going to talk autos and employment. Why don't you get a start? Tell us the story of how we got to where we are right now.

DANIEL RUIZ: I'm very excited to be sitting here next to Danielle. She's very much in tune with the job market, the macroeconomics. And one of the things that she, just out of the blue, sent to me one day was the Challenger Job Cut, Automotive Job Cuts Report.

So I asked for historical data on the Challenger Report. And I started charting, going back as far as I possibly could, see if there was any correlation, if I can somehow tie the thesis behind increasing automotive job cuts leading the overall unemployment rate. Sure enough, there was very hard evidence. And ever since then, we've just kind of been in constant communication. We've collaborated several times. And like I said, I'm super excited to be here.

ASH BENNINGTON: This is a really interesting conversation--

DANIELLE DIMARTINO BOOTH: It's all mutual, yes.

ASH BENNINGTON: Because we have we have Danielle, who does top down global macro. We have Daniel, who does bottom up US domestic analytics in a particular sector. So this a really interesting conversation. Danielle, what was it that you've--

DANIELLE DIMARTINO BOOTH: Well, so you know, I looked at Daniel's research as being the best on the domestic automobile industry. And it kind of flashed onto my radar eight, nine months ago, that all of a sudden, we are starting to see weakness in Chinese car sales. And then one month became two, became three. Now we're at 10.

So you know, I said, well, given Daniel's evidence and data on growing inventories here, and what's happening in China, what does this imply for the global economy? So I did a deep dive. And what I found was just beyond eye opening. The global automobile sector has been in an expansion for two decades now, if you can imagine.

The growth has been largely attributable to the growth of registered drivers in China. They have doubled in the space of six years to 350 million drivers. There will be 400 million registered Chinese drivers by the end of this year, which equates to the populations of the United States and Germany combined.

Now the Chinese government has done a ton. They've had two solid years. Can imagine Cash for Clunkers for two years? That's what they've had in China, literally. They've pulled such magnificent amounts of demand forward, that they're now suffering the backlash of that. And it was watching Germany melt down that really planted the seed for me. I said, what is going on here.

And then you look and you see that the ties between the German manufacturing monster-- they produce twice as many cars as the United States, third largest exporting nation in the world. $270 billion of auto exports every year. And an economy that is deeply reliant on its 800,000 directly employed autoworkers. And then everything that's related to them. And they're all producing internal combustion engine cars.

So you know, it's interesting that the cover of Bloomberg Businessweek talks about what the implications are of the shift to electric vehicles. The Chinese government has basically laid the law down and said, you will buy EV cars, period. And you'll be penalized for buying internal combustion engines. And we see that Germany is effectively in recession.

I mean, their ISM, their manufacturing survey came out at 44.7 in March. That's not-- that's not borderline with 50, which denotes the difference between expansion and contraction. It's deep in contractionary territory. And all of this has to do with the manufacturing of cars.

So when you put it all together, if there is a slowdown in the United States domestic market on top of Germany going into recession, on top of China being incapable, despite pumping $800 billion of stimulus into their economy in this year's first quarter-- that's an extraordinary number. But that's the small and medium enterprises. Their Cash for Clunkers is running out of gas, so to speak.

So if the US car industry does go into a slump, which is why I'm relying so much more on Daniel's research of late, you're talking about a turn in a secular expansion that's going to come to a screeching halt after 20 years.

ASH BENNINGTON: So that tees it up perfectly for you, Daniel. Daniel paints a very grim macro framework picture. You have the Chinese stealing future demand with stimulus. You've got a secular shift from a policy perspective, from internal combustion engines to electric vehicles. You've got one of the major exporting nations potentially dipping into a significant recession. How does that square with what you're seeing bottom up in the US automotive sector?

DANIEL RUIZ: So first of all, I don't disagree with anything that Danielle said. I think her macro research is outstanding. I think she paints it perfectly. The thing that I would imagine viewers are thinking right now is, why are stocks not reflecting the dire situation that's just been painted.

And I think part of the reason is because when you look at the financials of these companies, particularly the ones in the US that sell cars worldwide, the bulk of their earnings are here in the US. So if the US is perceived to be healthy, then we can brush off overseas weakness. But it's not healthy.

And just to go back for one quick second to really, really point out just how important the US is-- Danielle and I had a conversation about this a couple days ago-- 109% of Ford's total company EBIT came from North America last year. 86% of General Motors' total company EBIT-- this includes the Finco-- North America. FCA, 86% of total company EBIT, North America.

So that would explain the reason why everyone's kind of the-- heartbeats aren't raised, so sort of speak. But when you take a really, really deep look at what's happening and you look beyond the headline numbers, you know, the SAR--

DANIELLE DIMARTINO BOOTH: The seasonal adjustment factors.

DANIEL RUIZ: Exactly. That a lot of folks are pointing towards in March, the bottom line is we're down 133,000 vehicles this year. If you run that through for the next three quarters, that's a little north of a half a million cars.

ASH BENNINGTON: And where is that relative to aggregate production numbers?

DANIEL RUIZ: So that's a really great question. And this is where the analysis gets very tricky, too. There is no margin for error. OK? And that's where investing in autos gets really, really detailed, and it can really, really trick investors. As long as inventory levels are OK, a manufacturer can miss sales by small percentages for months on end. All that happens is inventory starts increasing, doesn't show up on the earnings report, because their production is steady.

It's when it gets to the critical level where they can no longer miss sales. Where the sales no longer supports the production rate that production gets cut and that's when it hits the bottom line. And that's where we're at.

ASH BENNINGTON: So your view has always been that these inventory numbers are critical, because it's a number that's not really fungible, right? It's a way that you actually see what's happening with financial health, and terminal demand simultaneously.

DANIEL RUIZ: Yeah. That's a great point, too. So if you look at inventory alone, that's a very one dimensional data point. Because as long as a sales rate supports the amount of inventory, the inventory can rise. That's not an issue. It's when the sales rate no longer supports the amount of inventory that you have a problem. Then you have to cut back.

ASH BENNINGTON: So that's why you look at it on a day count basis, right?

DANIEL RUIZ: Exactly. Yeah, and I use a rolling 12 month preferably to take the seasonality out of it completely, and really get a good feel for what's happening and if inventory levels are appropriate.

DANIELLE DIMARTINO BOOTH: You know, it's interesting, because when Daniel brought these inventory levels that were ticking up to my attention-- this is probably six weeks ago or so-- I said, well, why is the Chicago PMI, the Chicago manufacturing survey, so, so strong if there's this build up going on in the background? And it was shortly thereafter that Wards announced that there had been a 4.2% production cut in the month of February. And I started to notice that jobless claims were ticking up in the Big 10 auto manufacturing states.

And lo and behold, the Chicago PMI came out for March. And the future inventories number-- I was blowing up your phone that morning. The future inventories number swung from positive to negative to the greatest extent in the history of the survey that goes back to 1946.

These are inventories as confidence in future demand, basically. And what we saw this last week with initial jobless claims dropping to 196,000, the lowest in 50 years-- before I was even born, and that's saying something, I'm no spring chicken-- but one state flipped. And that was the state of Michigan. Up 16% over last year jobless claims.

So to Daniel's point, when change happens, when these critical thresholds that he's describing occur, change happens fast.

DANIEL RUIZ: Very fast. And it's been building up. And in typical fashion, I brought a couple of charts. The one that I'll touch on first is the 12 month rolling day supply of total vehicles, and then just trucks alone. Just the truck segment alone.

And as you can see in the chart, total vehicles are now at the same day supply level that they were back in December of 2008. So in the heart of the recession, truck day supply is the highest since June of 2008. This is incredibly important because our nation has completely shifted demand towards trucks, right?

ASH BENNINGTON: That's the highest margin segment.

DANIEL RUIZ: Absolutely.

DANIELLE DIMARTINO BOOTH: Trucks equals profit.

DANIEL RUIZ: Absolutely.

ASH BENNINGTON: So what does this tell us about what's actually happening in the underlying state of the economy? This is a message that most of our viewers aren't getting anywhere else, this notion that--

DANIELLE DIMARTINO BOOTH: Well, and that's I think where Daniel's work really shines. Is because he looks past the fleet sales that flatter the data, and he's like, no, Danielle, you have to focus on retail sales, which were down 4% in March, and 4% for the quarter as a whole, and 1% for last year as a whole.

DANIEL RUIZ: Yep. I like to call it you know, torturing data. I'm sure that's been you know used before. But these seasonal adjustments can throw people off. Basically, all they said is that if there was one additional day in March, then we would have sold more cars when in fact, we were down 3%. But Danielle and I chuckled about this too, because the fact of the matter is, they don't count Sunday as a selling days. And the reason why is because there's 12 states--

DANIELLE DIMARTINO BOOTH: 12 states that are absolute blue laws. You may never open on a Sunday. And then there is another six, where you can only-- in Texas, you can only open every other Sunday. You're talking about 18 states out of-- hello? Ridiculous.

DANIEL RUIZ: Right. But the rule applies to all. And I've worked in both markets. I've worked in blue law markets, and non-blue law markets. And let me tell you what the fact is. When you're closed on Sunday, all that means is you're going to be busier on Saturday and busier on Monday.

ASH BENNINGTON: Right.

DANIEL RUIZ: That is it. We have to focus on the year to date numbers, we have to focus, as Danielle said, on retail numbers, because we're focusing on the consumer. The funny thing about fleet that a lot of folks don't talk about is that it is incredibly, incredibly dependent on used car values, which I think are in danger this year.

Longer story. The moment used car values drop, fleet sales drop off a cliff. If you look at fleet sales prior to the recession-- I mean, they got cut in half year over year when things got really bad. So we can't rely on that. We need to focus on the consumer. We need to focus on what's happening in the retail market.

DANIELLE DIMARTINO BOOTH: And what was the weakest single aspect in the inflation data this month? Used car prices crashed. I mean, just remarkable just in the data that we've got now here in the last few days on the CPI and the BPI. They're both being dragged down by used cars.

ASH BENNINGTON: So this is what's so interesting, is the synthesis of these varying data points, and different ways of approaching the world. So you essentially are seeing kind of distortion in some of the data that's being officially reported, and attempting to cut through that by looking at a truer reflection of what underlying demand is.

DANIEL RUIZ: Right.

ASH BENNINGTON: And conversely, of Danielle, looking at the numbers through actually, in the tables, deconstructing them, and seeing things that are actually relatively similar, almost identical.

DANIELLE DIMARTINO BOOTH: Because I like to sit on government websites. It's fun. I need to get out more.

DANIEL RUIZ: You might refer to me as like, ultra micro, you know?

DANIELLE DIMARTINO BOOTH: Granular is not granular enough.

DANIEL RUIZ: And the reason why is because my thought process, my research process is literally eliminating all noise, and finding out what the silver bullet is. What is holding it all up. And then I focus on that. And the second chart I brought was a little bit of a deeper dive into what specific vehicles are most important in the US market and to the US automakers.

So the first is the Ford F-150. The truck represents 37% affords total production in North America, OK? Their day supply is at 84. If you look at the three years back to back, doesn't look that bad. But remember, I put 2017 there for a reason. And it's because that's the year that manufacturers cut production.

In 2018, nothing in the 80s is good. 60 to 70 is ideal. There was a supply fire, which helped with Ford F-150 inventories. So we shouldn't assume that the number in at the beginning of April is a healthy number in 2018. But as we move on to the others, they really start jumping off the page.

So Silverado has a day supply. Now of 128 days, right? Sierra has a day supply of 109 days. Those two trucks alone represent 24% of General Motors production in 2018. So volume and profit. And very very important.

ASH BENNINGTON: Probably a greater percentage of the profits based on the margins on the--

DANIEL RUIZ: Exactly.

DANIELLE DIMARTINO BOOTH: I think the average truck is what, $47, $48,000?

DANIEL RUIZ: Exactly. These vehicles are critically important, and more so than any of the other models that they carry in their lineup. FCA, which is a huge focus for me right now, because I think they're the first ones-- I think they will paint the picture for what's to come for the others very, very well.

ASH BENNINGTON: Why is that? Why is you see FCA as leading?

DANIEL RUIZ: Because they're in the most critical situation, in my opinion. My wholesale estimates have them down in production by double digits in Q1. But double digits in the vehicles that hurt, meaning trucks. There is no favorable mix there. It is trucks. They are down double digits in trucks. And that's a wake up call. That's a wake up call for FCA investors.

And again, going back to the chart, I've just told you that they're down double digits in manufacturing and production. Truck production specifically. Their Ram pickup truck has 134 days worth of supply. And their Wrangler has 112 days worth of supply. Those two vehicles combined are 33% of their total production volume in 2018.

DANIELLE DIMARTINO BOOTH: So we're going to see more production cuts is your bottom line.

DANIEL RUIZ: Yeah. Not only production cuts, but production cuts where they hurt.

DANIELLE DIMARTINO BOOTH: Right. You know, it was really interesting in the latest payroll report that we saw auto manufacturing hours worked decline. And if you look over the last three months, you've kind of gone from a rate of 2.5% to the last three months on an annualized basis, you're running 14% decline in auto workers. And if that doesn't work, if cutting their hours doesn't work, then you write the pink slips.

ASH BENNINGTON: Right. And there are feed throughs on that, right?

DANIELLE DIMARTINO BOOTH: Of course.

ASH BENNINGTON: The knock on effects that come from-- because they're high paying jobs.

DANIELLE DIMARTINO BOOTH: Exactly. These are high paying manufacturing jobs. And if you look at the Challenger data that come out monthly, after retail, which we know is a beleaguered sector, and industrials in general, we're hearing that trucking is weakening very quickly. The third biggest category of job cuts thus far in 2019 is the auto sector.

ASH BENNINGTON: And what sort of next order effects do you foresee coming off of that if we continue to see the declines that Daniel's data suggests?

DANIELLE DIMARTINO BOOTH: Well, what you need is a bounce back in sales. You need kind of a Cash for Clunkers or something. And I don't even say that tongue in cheek. Because if you're talking about a bounce back in sales-- because we typically have consumption come roaring back in the second quarter based on tax refunds. And what we know thus far this year is that tax refunds are down 4% over 2018. And it's not so much that people necessarily net have less money in their pockets-- households.

It's that-- HR Block did a survey that showed that 80% of Americans didn't alter their withholding when they should have. Meaning 80% got a big old surprise when they went to go file their taxes. And instead of saying, push the button, I want my refund, you're looking across somebody at Jackson Hewitt or wherever, they're like, no, no you owe taxes. And they're like, what, don't push the button.

So UBS came out with a port a few days ago that said versus their initial estimates, they have had to take down what they anticipate households receiving in tax refunds by $25 billion. In addition to that, you've seen gas prices go up by about $0.50 a gallon. That's another 65 or so billion dollars out of households pockets. And then you have the third insult to injury, and that's come tax day, that so many Americans are going to be having to pay taxes when they weren't receiving refunds last year.