Silver tsunami, reshoring, and the unbearable lightness of tariffs
Some charts on longer-running themes
silver-tsunami is a hyper-growth business;
China trade savings, estimated
one big advantage? the cost of labor
who’s paying those tariffs anyways?
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Random Walk took the week off, and fortunately, not a whole lot happened while I wasn’t looking.
I’m still churning through my inbox, but here is a small grab-bag of charts, revisiting ongoing themes about (1) retirement and private credit, and (2) reshoring, tariffs, etc.
ICYMI
Silver tsunami is a hyper-growth business
The big private credit-equity shops, Apollo APO 0.00%↑ and KKR 0.00%↑, reported a few weeks back, and this one caught my eye.
As you may recall, Private Credit and Insurance go together, hand-in-glove. Retirees need steady streams of predictable yield, and lenders need steady streams of sticky deposits premiums.
So far, it’s going pretty well (and there a plenty of good reasons that it should continue to do so). It’s going so well, that in Apollo’s case, at least, the ‘silver tsunami’ is a hyper-growth business:
Organic inflows into Athene (Apollo’s life insurance business) have been doubling (more or less) every 2 years.
Doubling every two years is a helluva run that reflects both a deliberate strategy well-executed, and, of course, the growing share of retirees.
In all events, the steady demand for retirement products will continue to support the growth of private credit firms as lenders of choice. That also means that to the extent credit markets (and credit catastrophes) intersect with the real economy, annuity/retirement products are increasingly the focal point.1
What if there aren’t enough good yield-generating risks to go around? Best not to think about that.
Breaking up with China is hard to do
Just a few charts on the trade war, tariffs, and reshoring.
That off-shoring to China has saved us a lot of money, at least in the short-run, is pretty indisputable.
Researchers at the St. Louis Fed took a stab at estimating exactly how much money we’ve saved by shifting sourcing to China over the years:
Import prices would be ~10% higher, absent the sourcing shift to China.
10% actually seems pretty low, but in all events, the savings have gone in reverse recently, given the move away from China to slightly more expensive export hubs.
But yeah, making things in China has been a substantial deflationary force for the past few decades. Making things elsewhere is going to be more expensive, for sure.
In particular, one big barrier to reshoring is the relative cost of domestic labor:
Manufacturing pay in the US is 7X higher than in China.
The point is that one reason that China is able to out-manufacture everyone is that they pay their people a lot less.
True enough, but that’s really not the whole story, and certainly not anymore.
The primary reason that China out-manufactures everyone is that China is really good at manufacturing, once they decide there’s something they want to manufacture—including, or especially, complicated things. I mean, China was an auto backwater for decades, and then in ~5 years, BYD basically took over the world.
Now, China definitely seems to copy a lot, or at least, find its inspiration abroad (and they’ve been cutting prices, a lot, too), but when it comes to making things at scale, China has a lot more than just cheap labor.
On the plus side, whatever the labor costs, manufacturing has gotten a lot less labor intensive recently, so labor costs are perhaps less of a barrier than Bridgewater seems to think.
Who’s paying for tariffs?
According to Goldman, it seems like US firms are paying the brunt of the cost, at least for now:
Goldman estimates that US companies are bearing ~64% of the tariff costs, while consumers pay 22%, and foreign exporters pay 14%.
However, while US companies are footing the bill for now, Goldman expects that eventually consumers will (67%) and foreign exporters (25%) will pay the lion’s share of the bill.
These estimates are pretty hand-wavy because tariffs have been a moving target, there’s been lots of front-running and destocking, and costs are born in all sorts of different ways, including in ways that don’t show up in the sticker price. But, it does seem reasonable to expect that margins might compress a little in the near-term.
Previously, on Random Walk
Private Credit and Insurance, two peas in a pod (reprise), and a chart dump on default rates
five charts on the rise of private credit in life insurance
Energy in 1776
It’s July 4th, so Happy Birthday America, and we’re going to keep it light and only semi-topical.
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It also remains the case that private credit generally continues to eat trad-bank lunch (although not as dramatically as before), but that doesn’t mean that banks are insulated from whatever it is that private credit is doing. As Random Walk has pointed out before, lending to the lenders is a growth vertical for banks:
Loans to non-depository institutions are the fastest growing asset on the balance sheet (even if they are a relatively small piece of the overall pie).