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1.  The Spark Fades: The Electric Vehicle Sector Feeling Pain

·         After a boom in electric vehicles (EVs) post-2020, things are quickly turning to bust.

·         Chinese EV exports are soaring, which is causing pain for producers around the world as layoffs mount.

What you need to know: Tesla announced1 it’s downsizing its Buffalo, New York factory workforce by 14%, affecting 280 positions according to a state filing. This move comes as part of the company's broader restructuring plan announced by CEO Elon Musk to reduce global headcount by over 10%, reflecting slowing demand for electric vehicles. Some divisions may see cuts of up to 20%. Meanwhile, Rivian announced2 on Wednesday that it has implemented its second round of job cuts this year, reducing its workforce by about 1% as part of cost-saving measures amid a slowdown in electric vehicle (EV) demand.

Why it matters: As Chinese exports of EVs soar, it is pushing down prices for EVs around the global. This is leading to layoffs amid lower margins and declining sales from non-Chinese EV makers – which trickles into layoffs. This could become a big talking point in the months to come – especially in an election year.

Now the Dunham Deep Dive: The electric vehicle sector has had a rough year as overcapacity (too much supply relative to demand) ramps up – especially from China.

Because of China flooding the world with excess EV supply, prices have declined as there’s increased competition from producers trying to move inventory to make a sale (if there’s not enough demand, prices drop via “discounts” to try and entice buyers).

And while that is simple economics 101 – the potential ripple effects from it are troubling.

Too much supply relative to demand has caused sales of EVs to decline, which compresses incomes and profit margins, and now layoffs are the end results (you can’t pay employees if you lose money, right?)

Making matters worse, China is flooding exports into the world economy to try and prevent unemployment in their own country (by selling abroad because the weaker domestic demand).

Alas, unemployment for the EV sector rises elsewhere  - like in the U.S. or EU.

To highlight this weakness in the sector, take a look at the S&P Kensho Electric Vehicles Index3 (a way to measure the performance of companies involved in the electric vehicle sector and the ecosystems supporting it) – it’s down 14% year-to-date (as of April 18, 2024).

This is a trend worth monitoring – one I believe will be pivotal in the coming year. Both politically and economically.

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Figure 1: S&P Global; 2024

2.   U.S. Inflation Is Back On The Rise As Financial Conditions Ease (Even As Rates Stay High)

§  Underlying inflation in the U.S. tops forecast for a third month as financial conditions loosen.

§  A persistent shortage of housing is partly to blame, as are rising commodity prices and car insurance premiums.

What you need to know: The anticipated decline of US inflation to 2% in 2024, allowing the Federal Reserve to gradually lower interest rates from a two-decade high, has been thwarted by unexpectedly persistent4 price gains. Fed Chair Jerome Powell's acknowledgment of sustained inflation suggests that borrowing costs will remain high for an extended period, signaling a shift in global policy implications.

Why it matters: The persistent housing shortage, along with increasing commodity prices and car insurance premiums, contributes to the current economic challenges. Some critics also attribute the situation to Fed Chair Jerome Powell, who prematurely hinted at interest rate cuts, sparking market optimism and driving economic activity. Since Powell's remarks in December, stocks and bonds have surged in value by $7.5 trillion, approximately 30% of US GDP, leading to a significant easing of financial conditions, as evidenced by a Bloomberg index tracking investment conditions.

Now the Dunham Deep Dive: To the economic worlds “surprise”, it appears that inflation is harder to tame than the Fed wanted us to believe.

Note that these are also the same Fed members that said publicly that the excess of the COVID stimuluses would be “transitory” – aka brief and not chronic.

To give you some context, Jerome Powell – the Fed Chairman - said at his March 17, 2021 press conference5 that, "It'll turn out to be a one-time sort of bulge in prices, but it won't change inflation going forward."

Well, three years later inflation continues to remain stubbornly high. Although, on the other hand, it’s true that the rate of annual inflation (the percentage change) has decelerated.

It’s important to state that there are other factors effecting prices that the Fed doesn’t control (such as the U.S. Treasury running massive deficits).

To put this into perspective: as of 2023, the U.S. federal deficit was 6.3% of GDP – the highest level outside of a recession or wartime.

Remember, when the government runs these deficits, that means it is putting more money into the system (spending) compared to what it is sucking out (taxing). Thus it helps push prices higher (their spending fuels someone’s income or some demand somewhere).

I believe this puts the Fed between a rock and a hard place:

On the one hand, they talked about cutting interest rates at a time when inflation is accelerating.

But on the other hand, there are already cracks showing in the consumer debt markets – such as debt delinquencies – specifically credit cards and auto loans - surging to their highest levels since 2008-2010 (which I shared with you in a previous blog post).

Something has to give.

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3.  Left Behind: China’s Youth Unemployment Rate Remains Elevated – Even After Beijing Revised How They Calculate It

·         China’s March unemployment rate for individuals aged 16 to 24 remained constant at 15.3%, as via the National Bureau of Statistics.

·         The world’s second largest economy continues struggling to find its footing.

What you need to know: China reported6 a consistent youth unemployment rate in March, following an official's caution on the need for “closer scrutiny”. The unemployment rate for individuals aged 16 to 24 remained unchanged at 15.3% last month, matching February's figures, as per Thursday's data from the National Bureau of Statistics.

Why this matters: The world’s second-largest economy has grappled with post-pandemic stabilization. Despite strong growth in the first quarter, recent data showing lower-than-expected retail sales and industrial output hint at impending challenges. Chinese domestic economy remains relatively anemic and is causing headaches for Beijing amid the sour outlook.

Now the Dunham Deep Dive: China’s economy continues showing weakness – and the recent youth unemployment numbers show no sign of recovery.

It’s important to note that the youth unemployment rate was spiraling out of control in 2023. It got so bad that Beijing actually stopped publishing the youth unemployment rate last summer following a historic peak of 21.3% (that’s over 1/5 of youths being unemployed).

Officials resumed its release in January under a “revised” methodology that excludes students, claiming it provides a more accurate reflection of reality (how convenient).

This is yet another indicator that China’s economy is relatively anemic and why Beijing continues pushing towards aggressive manufacturing and export subsidies to try and boost growth (since it can’t get it at home).

But – as I’ve detailed before – the rest of the world likely doesn’t want to sit idly by and absorb all these Chinese imports by crowding out their own production capacity and causing unemployment at home (for example, as shown in the First Category above about electric vehicles).

Or said simply, China is far too large to try and export its way out of a slowdown.

China is the second-largest economy in the world – by a wide margin. Thus, I believe, any continued weakness will affect the global economy and have waves upon waves of ripple effects.

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Figure 2: Bloomberg, 2024

Anyways, who knows what will happen? Maybe this is just noisy data.

As usual, just some food for thought.

Have a great rest of your weekend.









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Index Definitions:

The S&P Kensho Electric Vehicles Index is designed to measure the performance of companies involved in the electric vehicle sector and the ecosystems supporting it. A subsector index within the S&P Kensho New Economy Index Series, the S&P Kensho Electric Vehicles Index intends to represent companies that are focused on producing electric road vehicles and associated subsystems, powertrains, energy storage systems, clean fuel technology (such as hydrogen fuel cells) and charging infrastructure. Significant technology and materials advancements over the past few years, together with government incentives, have ushered in the real and practical possibility of clean, zero emissions travel.

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