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Overview
Major shifts in credit quality are afoot. The purpose of this installment is to assist in identifying them and, hopefully, assist sophisticated institutional investors and risk managers in adjusting positions. We are structuring this installment in terms of major themes. (Note: this installment was not written by persons directly responsible for ratings.
Automobiles
The bankruptcy of First Brands and Tricolor is a reminder of the concerns we have expressed over the past couple of years. The basic problem is that, because of the massive expansion of industry capacity and the emergence of more efficient producers, much of the automobile industry will need to be reworked. Our understanding is that with the entrance of Chinese manufacturers, industry capacity has increased by at least 20%. For most capital-intensive industries, a 20% increase in suppliers is a disaster, which is, of course, reflected in most manufacturers’ financial results.
However, prospectively, the pain is likely to increase as some of the newer capacity is far more efficient than the old. For example, Tesla produces vehicles in 10 hours compared to VW’s 30 hours. Additionally, the number of humans needed for production is apparently less than half of that needed by legacy carriers.
Implications: Our view is that the implications will be massive and can be compared to that experience when Henry Ford introduced the assembly line; essentially, it bankrupted most legacy manufacturers. If our premise is accurate, the vehicle manufacturers will not be the sole casualties.
Retailing
The chart below is rather sobering. Few recognize its relevance. Essentially, a technology-infused distributor is in the process of hollowing out THE retailing star of the past four decades.
Perhaps some will say that it is just a matter of time before Amazon and similar firms reach a point where their competitive advantage dissipates. While we agree with the notion that trees do not grow to the heavens, a contrary view is that the advantages of the tech-based retailers grow.
Implications: If our premise is accurate, Amazon and other similar firms will continue to squeeze traditional retailers. While this theme has been ongoing for years, it is likely to continue and make for the continued shifting in the retail landscape.
Platforms/Crypto
Online services have replaced brick-and-mortar services (financial services, retail, entertainment, etc.). While it might be hard to believe, we might be in the beginning stages of this shift. For example, banks can experience a run facilitated by the near instantaneous moving of funds.
It is highly likely that financial services can best be addressed via the largest online platforms. Perhaps it is just a matter of time before X, Meta, Alphabet and others become more significant forces in banking and other financial services.
Regarding crypto, there is little doubt that the current administration has encouraged its development. How these assets will reshape our economies is hard to anticipate, but it is probably naïve to assume there will be little impact.
Implications: If our premise is correct, it is reasonable to assume that consumer services will be reshaped over the next decade. The platforms fit the mold of “faster, better, cheaper” and perhaps it is merely a matter of time before the platforms become the portals for the delivery of a wide variety of services.
Underemployment
Recent college graduates have experienced significantly more difficulty locating suitable employment than was typically the case in non-recessionary times. Additionally, the educational indebtedness is greater than had previously been the case. Perhaps these trends are coincidental, or perhaps there is something more pernicious at play.
Implications: If our premise is accurate, the notion of the thirty-year-old son living in the basement and engaging in periodic “gig” employment might, over time, translate to a fifty-year-old living in the same house, but now living in his deceased parents first floor and surviving on their savings. While not ideal, perhaps for many, this will become the norm.
Conclusion
Businesses operate in the broader context of a political environment and that environment is massively shifting. Even over the past six months, there have been massive changes, and our view is that there will continue to be changes.