CONSUMER WATCH
Friday, we get personal income and spending data for August. This is from Morning Consult, a consumer survey firm:
The ‘Resilient U.S. Consumer’ Is Showing Some Signs of Fatigue Consumer spending strength is beginning to wane heading into the fall, just before the resumption of student loan payments
Consumer spending declined in August as summer splurges on travel and entertainment shifted to the rearview and midsummer sales pulled forward some retail purchases to July. Savings and debt may draw resources away from spending in the coming months. (…)
All income groups pulled back on spending in August, but high- and middle-income earners in particular reduced outlays after driving most of the strength earlier this year. High- and middle-income earners spend more on discretionary categories generally, and over the early part of the summer months, these groups helped propel spending above seasonal trends.
Notably, price sensitivity has risen the most for high-income consumers compared with a year ago and is on the upswing again after declining in May and June. If higher price sensitivity persists for high earners, spending could soften further over the next few months.
The recent uptick in top-line inflation is weighing on real income growth and making it more difficult for consumers to save. Both incomes and savings remain below their long-term trend, and just recently ticked lower after several months of recovery. Relative to a year ago, lower-earning households were the only group less able to save. Going forward, the recent increase in energy costs may squeeze budgets for these consumers even more. (…)
Already in August, the large jump in education spending coincided with a 9% pullback in spending on all other categories for Gen Zers, who are most likely to be affected by the expiration of the student loan repayment pause. (…)
(…) In a survey of more than 600 US consumers that have outstanding student debt, nearly 90% of respondents said they were at least “somewhat concerned” about meeting all their monthly expenses. Half of those surveyed said they were “very concerned.” (…)
Jefferies found more than half of respondents plan to spend less on apparel and accessories, while restaurants and footwear were the second and third most frequently listed categories where consumers plan to spend less. (…)
Americans outside the wealthiest 20% of the country have run out of extra savings and now have less cash on hand than they did when the pandemic began, according to the latest Federal Reserve study of household finances.
For the bottom 80% of households by income, bank deposits and other liquid assets were lower in June this year than they were in March 2020, after adjustment for inflation. (…)
But among the wealthiest one-fifth of households, cash savings are still about 8% above their level when Covid hit. By contrast, the poorest two-fifths of Americans have seen an 8% drop in that period. And the next 40% — a group that roughly corresponds with the US middle class — saw their cash savings drop below pre-pandemic levels in the last quarter. (…)
CHINA WATCH
Teetering China Property Giants Undercut Xi’s Revival Push
Just as China enters a key holiday sales season, a raft of headlines are weighing on already-frail confidence in the property market. Evergrande said it has to revisit its debt restructuring plan and a unit missed a yuan bond payment. Former executives at the defaulted real estate giant have been detained, Caixin reported. Meanwhile, China Oceanwide Holdings Ltd. said it is facing liquidation and Country Garden Holdings Co. is still trying to avoid a potential default. (…)
The eight-day national holiday starting Friday is the centerpoint of the industry’s September-October busy season. The stakes are higher than ever this year, as the housing slowdown weighs on China’s economic recovery and developers that are struggling to refinance rely on cash from sales to meet debt obligations. (…)
- China Evergrande Misses Payments on $547 Million Onshore Bond
- How Country Garden Plays Into China’s Property Mess
(…) Country Garden’s $187 billion of total liabilities as of June 30 were well below Evergrande’s $328 billion. However, Country Garden has four times as many pending projects — 3,121 — as its rival, so a collapse by the firm would in all likelihood have a greater impact than Evergrande’s landmark default in late 2021, according to Bloomberg Intelligence. (…)
If it can’t get the cash it needs to keep building, that could impact as many as 651,000 pre-sold property units, according to BI. (…)
Macron Is Pushing Europe Into $900 Billion Fight With China EU probe into Chinese electric vehicles carries trade risks
(…) Now the EU has begun a subsidies investigation that could lead to tariffs and raises the prospect of a sea change in European policymaking that would cast aside principles of free trade and open markets as the best way of defending the continent’s economic interests. (…)
China’s vice premier, He Lifeng, expressed “strong concern and dissatisfaction” over the probe on Monday to the EU’s chief trade negotiator, Valdis Dombrovskis. (…)
Any provocation of China is a huge gamble for a bloc already struggling to emerge from the energy crisis and the worst bout of inflation in the history of the euro area. Adding to the unease, Chinese tariffs would be difficult to predict and could have the potential to entangle a range of the continent’s biggest firms, including French luxury groups for which Asia’s largest economy is a key market. (…)
- Mercedes S-Class, Porsche Stand to Lose Most in China EV Row Majority of German luxury EVs sold in China are imported
The European Union’s probe into Beijing’s electric-vehicle subsidies is meant to protect its carmakers from a flood of cheap Chinese cars. But if it leads to tit-for-tat tariffs, Mercedes-Benz Group AG and BMW AG’s biggest moneymakers will be most exposed.
For Germany’s high-end manufacturers, including Porsche AG, China has proven an insatiable market for their most expensive models, like the S-Class, 7-Series and Cayenne SUV. Those vehicles, however, are mainly imported, putting them in the line of fire if Beijing retaliates against any EU measures. (…)
China is the biggest destination for Germany’s most expensive vehicles. Last year, the country accounted for more than a third of global sales of BMW’s 7-series and Mercedes’ S-Class. The 1.47 million yuan ($201,000) Maybach ships more than 1,000 times a month from Chinese showrooms.
For Volkswagen subsidiary Audi, China made up more than a third of global sales. Last year, the carmaker exported to China more than 10,000 of its A8 luxury sedans, which are made exclusively in Neckersulm, Germany.
Roeska and Lee estimate that Chinese revenue streams represent more than 25% of the German automakers’ underlying net income. (…)
- Tesla’s China Exports in Crosshairs of EU Anti-Subsidy Probe Carmaker ships more EVs to Europe from China than any other
(…) Through the first seven months of this year, Tesla sold an estimated 93,700 made-in-China vehicles across Western Europe, accounting for roughly 47% of its total deliveries, according to Schmidt Automotive Research. The next biggest exporter of EVs from China to Europe was SAIC’s MG, with roughly 57,500 registrations. (…)
Tesla has enjoyed perks in China that other international companies struggled to obtain, with the most notable being the state’s blessing to wholly own its domestic operations, rather than have to share custody with a local joint venture partner. Tax breaks, cheap loans and other forms of assistance helped turn China into Tesla’s most important market outside the US.
These and other forms of support that China provides domestic manufacturers, including credits from state-owned banks, capital provisions from state investment funds, and provisions of land and electricity, are now coming under EU scrutiny. Chinese carmakers also benefit from subsidies in related sectors across the value chain, including batteries and software. (…)
In recent probes of other sectors such as e-bikes and fiber-optic cables, the EU discovered subsidy margins ranging from 4% to 17%, people familiar with the findings said. (…)
There’s concern within Europe that its companies have fallen behind Tesla and Chinese companies with respect to EV and battery technology, threatening the viability of the EU’s car industry that provides almost 14 million direct and indirect jobs. (…)
BEARISH INSIDERS
(Barron’s via Isabel.net)
YIELD TO OIL?
Private Equity Is Piling Debt on Itself Like Never Before
Hit by a drought of deals and dwindling cash, some buyout firms are starting to resort to backroom financing to help meet fund commitments or enable succession planning. The loans — backed by assets including the promise of future income — carry interest of as much as 19%, a rate that’s more akin to the charges faced by consumers rather than corporate borrowing. Even a junk-rated company in the US paid 10% on a bond recently. (…)
“If the value of the fund drops, for example, you’re looking at a margin call situation,” said Jason Meklinsky, chief revenue and strategy officer at Socium Fund Services, a New Jersey-based firm that helps administer PE portfolios. “It would be like a volcano meets a tornado.” (…)
Cash on hand at PEs is near the lowest since at least 2008, according to data from PitchBook. (…)
One of these types of financings is the relatively new manco loan, for which appetite is soaring. Taken by the management company or the entity that oversees the PE investments, this debt uses cash flows such as fee streams and equity returns as collateral.
The manco loan proceeds are used to meet various needs: seeding new strategies, succession planning and even funding an individual partner’s equity stake in the PE fund. (…)
“The investor universe is unbelievably unaware of the underlying leverage throughout this entire ecosystem,” said New York-based Dan Zwirn, founder and chief executive officer of Arena Investors LP, an institutional manager overseeing more than $3.5 billion in assets. “That hasn’t hit the PE investors yet, but it’s becoming more clear for real estate investors,” he said, referring to the recent delinquencies in the commercial property sector. (…)