7 minute read
1. Credit Card Delinquencies Are Surging At A Worrying Rate
- Delinquency transition rates have increased for all debt types in Q1/2024. But about 8.9% of credit card balances have transitioned into delinquency annually.
- Further research shows that almost 1 in 5 users maxed out their credit cards.
What you need to know: According to the latest New York Federal Reserve data1, 30-plus day delinquency rates on credit cards have surged over the last 16 months – hitting their highest level (8.9%) in more than a decade – as consumers begin missing credit card payments at a faster pace.
Why it matters: The entire thesis for the “no landing” (aka where growth won’t slow down amid higher interest rates) has been based on the idea that the U.S. consumer is healthy and spending. But surging credit card delinquencies show us otherwise (even in the face of a relatively strong labor market). This is important as it shows us the percentage of people who are struggling to repay their debts – which is historically a harbinger of problems.
Now the Dunham Deep Dive: Well, this shouldn’t come as a surprise. The debt-fueled splurge by consumers is now causing headaches as delinquencies surge – and will likely continue to.
Making matters worse is that the problem is compounding because the Fed’s rate hikes have lifted annual percentage rates (APRs) on credit cards to over 22% - the highest level ever recorded.
As you know, more debt and higher interest rates are a dangerous recipe. And together, it’s squeezing households2 dry – hence why missed payments are beginning to snowball.
I wrote to you a couple of weeks ago in the Morning Pour titled – “Economic Crossroads: What Lies Ahead for Consumers as Excess Savings Evaporates” – highlighting more of the issues plaguing households.
But the gist here is that consumer credit is looking shakier and shakier.
And if the whole narrative that the U.S. is growing is based on a “healthy” and thrifty consumer, then this is most definitely a troubling trend.
Historically we have seen time and time again what happens when debt defaults begin mounting. So beware.
I will keep you in the loop with further updates.
2. Race To The Bottom? An Auto Price War Is Brewing As Vehicle Inventories Swell
- Auto manufacturers are dealing with both overproduction and weaker demand, causing a potential price war as they deal with too much supply.
- This is pushing auto manufacturers back toward bad habits (price wars) that they “swore off” only a few years ago.
What you need to know: The US car market is experiencing elevated inventory levels, leading to significant deals from automakers, a stark contrast to the scarcity of such offers during the pandemic. While discounts are widespread, EVs stand out with incentive packages often exceeding 15% to 20% of average transaction prices, according to Kelley Blue Book.
Dealers are also offering incentives across various models to clear last year's stockpiles, says Edmunds3. This indicates that automakers may not have fully embraced the lesson of better balancing supply and demand post-Covid.
Why it matters: The pileup of excess cars is creating a price war between auto producers as triple-digit inventory levels (the stock of cars sitting at dealers) call back to the days of challenging times for Detroit when overproduction was rampant. During those times, too many cars chased too few buyers, leading to depressed prices and squeezed profit margins (sound familiar?).
Now the Dunham Deep Dive: Now many longtime readers know that I have been worried about this situation building for months – that auto producers would be dealing with overproduction, declining demand, and increased competition all at the same time.’
Making matters worse, auto loan delinquencies have surged as individuals miss payments.
- According to the New York Federal Reserve4, roughly 8% of auto loan balances transitioned into delinquency over the last year as of Q1/2024.
So, what does this mean?
Well, it appears as if an auto price war may break out. . .
But first to give you a little history of how we got here - when COVID hit, it forced the auto industry to temporarily halt production and disrupted supply chains for several years. Thus, demand far exceeded the number of vehicles companies could produce, putting carmakers in control of pricing.
But now that supplies are rising and demand is faltering, the opposite situation is happening – carmakers are losing pricing power.
See, for example, if Ford can’t move inventory, they will slash prices (offering discounts) to incentivize buying. But it’s not like Tesla or Toyota will sit idly by while Ford takes their lunch (market share). So, they’ll also cut prices and offer even bigger discounts. And on and on it goes until only the biggest survive (many will see their profit margins crushed during this potential period).
So, let’s break it down -
The Good: Buyers can find better deals on car purchases amid the flurry of discounts.
The Bad: Car owners may see their used car prices sink, potentially pushing them into negative equity (when the loan on a car exceeds its value).
The Ugly: Car company profit margins will shrink as they “race to the bottom”, trying to move inventory and make room for next year's models by slashing prices.
Something to monitor.
3. The Chinese Yuan Weakens To Its Lowest Level Since November As Beijing Allows Declines
- China’s onshore yuan fell to its lowest level in more than 6 months.
- A weaker yuan will likely amplify China’s already imbalanced economy, hurting domestic consumers while stimulating exports.
What you need to know: China's onshore yuan has depreciated5 to its lowest level since November amid indications that policymakers are allowing the currency to weaken against a strong dollar. The People’s Bank of China has gradually lowered its daily reference (currency peg) rate for the yuan, resulting in a drop to 7.25 per U.S. dollar - the weakest in four months – and showing that Chinese authorities are willing to weaken the yuan further.
Why it matters: The People's Bank of China (PBOC) has been grappling with the challenge of managing the pace of yuan depreciation to support economic growth and exports, while avoiding market instability, weaker consumption, and capital flight (money flooding out of China). Throughout the year, the PBOC maintained stability in the currency, but mounting pressures from increased capital outflows and sluggish domestic economic conditions have necessitated careful adjustment.
Now the Dunham Deep Dive: So much for the Chinese yuan taking over the U.S. dollar, right?
All kidding aside, this is a serious trend that bolsters my trade war thesis – with Beijing allowing to reduce their currency peg and let the yuan weaken, thus making exports more attractive.
The problem? Well for starters, a weaker yuan will hurt Chinese consumers as it increases their import costs (aka it takes more yuan to import the same goods). And when you’re the world’s second-largest economy, that’s kind of a big deal – especially to those that depend on exporting to China.
The second – and more pressing – issue is that a weaker yuan also makes Chinese exports more attractive.
The world is already battling with China trying to export its way out of its own 2008-esque-like crisis (I’ve written about this in depth before – read here and here if you need to get caught up). But the gist is that no other country wants to subsidize Chinese growth at their own expense.
- For example, let’s say cheap Chinese exports flood into the eurozone. Domestic manufacturers could suffer from diminishing sales and production levels as more consumers buy cheaper Chinese goods, which would then trickle into bankruptcies and layoffs, and a very upset populace. Thus I have to wonder: will the rest of the world deal with these issues in order for China to export its way out of a slowdown? I don’t believe so.
Currency values are a major way for economies to tinker with imports and exports. With China’s recent cuts to the yuan, it’s definitely something worth monitoring as it will have global repercussions.
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.
Sources:
1. Higher for Longer Rates Means Debt Pain for Consumers and Businesses - Bloomberg
2. Credit card delinquencies surge, almost 1 in 5 users maxed-out: Research (thehill.com)
3. Carmakers Dangle Big Discounts as Inventory Swells - Bloomberg
4. Household Debt and Credit Report - FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org)
5. CNY USD: Yuan Weakens to Lowest Since November as China Allows Declines - Bloomberg
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