Why are the Wealthy Taking out More Loans?
If you haven’t been living in a bunker growing your own crops and killing wild deer for food you have probably noticed that the prices of many things have gone up in the last 18 months. You may have also noticed that the prices of some things have gone up more than others and even some things have gone down. The main input into many goods comes from oil and gas (think plastics, fuel, shipping, etc.). Indeed the price of retail gas has nearly tripled from its low point in 2020 of $1.89 (see Figure 1). The other major rise in cost here is food. Although food has largely tracked inflation (see Figure 2), it is rising faster than most other items.
Figure 1. Retail Gas Prices since 1992. Courtesy of the US Energy Information Administration
Figure 2. The dark blue bar is bigger than the other ones.
As household incomes rise, the percentage spent on the staples declines (see Figure 3). The importance of this is twofold: lower incomes will be more disproportionately affected by inflation because they will spend a larger percentage of their incomes covering the basics i.e. gas and food. And the wealthy? They may not feel much impact from inflation or change their spending habits.
Indeed, Walmart is lowering its profit outlook due to inflation. The reason? Walmart’s customers span all tiers of the economy, while a luxury business may only target the top tier(s) of the economy.
Figure 3. As income rises the percentage of income spent on that category decreases. For example the lowest income group spends 27% of its income on food while the highest only 6%.
Figure 4. The Annual Let Them Eat Cake Conference
The current reality on the ground is that the rich continue to invest and borrow money. There are likely two reasons for doing so: The current environment is not hurting their incomes much and expenses as a percentage of their salaries are not rising enough to impact them. Many are using their stock portfolios as collateral to borrow money. Much of this was built up from the last decade of low interest rates which led to much larger portfolios. Time will tell if the wealthy are going to pull back on spending too and the rise in wealthy loans will temper itself. For now, it’s important to remember that different segments of the economy have been impacted in different ways and to use that information when investing to your advantage.
As value investors the importance of understanding the macroeconomy is very important. The economy is impacted in different ways by recessions, supply shocks, and other economic hits. Sometimes this leads to legitimate changes in a business's moat. Other times it's a perception not supported by evidence. The savvy investor is able to take advantage of this discrepancy between price and value.