Car Troubles

Here's what sent Sri Lanka into a debt crisis ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

July 11, 2022

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TOGETHER WITH

Good morning.

Starbucks quietly yanked a new breakfast sandwich from its menu less than a week after its debut, according to multiple reports. The sandwich, which combined breaded white chicken meat with "fluffy eggs and a maple butter spread on a toasted oat-biscuit roll" and vanished on June 26, was canned over unspecified quality concerns that, the coffee chain stressed, had nothing to do with salmonella or listeria.

So for those who complained about indigestion and worse on social media, it must have been the coffee.

Morning Brief

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Sri Lanka's economy is in full-fledged crisis after its top two leaders resigned.

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Car loan payments have reached record highs.

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Not all grocery items are suffering inflation equally.

Global Economy

Sri Lanka's Economy Collapsed and Leaders Resigned, Here's What's Next

Hundreds of thousands of protestors in the streets of the capital city. The prime minister's house set on fire. Food shortages so dire that civil servants are getting extra time off to grow their own.

Those are just some of the scenes playing out in Sri Lanka, where the country's two top politicians — Prime Minister Ranil Wickremesinghe and President Gotabaya Rajapaksa — agreed to resign Saturday. An economic "collapse" has jeopardized the lives of 22 million.

How Things Got Here

Corruption and incompetence, not necessarily unrelated, jointly led Sri Lanka into a debt crisis driven by a baffling series of policy decisions made worse by the pandemic. After Rajapaksa was elected president in 2019, he passed the largest tax cuts in the country's history, costing Sri Lanka $1.4 billion per year despite the need for revenues to pay for foreign debt owed on infrastructure projects.

The tax cuts were reversed after ratings agency downgrades this year, but the downgrades made it harder and pricier to borrow, worsening Sri Lanka's economic outlook. The list of things gone wrong doesn't even begin to end there:

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Last year, Rajapaksa unexpectedly banned chemical fertilizer imports, which caught the agriculture sector off guard and decimated the output of rice crops. The global pandemic also halted tourism, an important source of revenue.

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In recent weeks Sri Lanka began running out of money to pay for essential goods. The local currency has collapsed 80%, leaving the country with virtually no money to import food, gas, milk, or even toilet paper. Food inflation has topped 57%, made worse by the Ukraine war, and 90% of families have started skipping meals, according to the UN.

What Now: Sri Lanka owes $51 billion and doesn't have the money to make interest payments, barely surviving on a $4 billion credit line from India. The country has to make $7 billion in debt payments this year to avoid default, and is seeking $3 billion in emergency loans from the International Monetary Fund. The IMF wants tax and interest rate hikes for that to happen. Sri Lanka is also negotiating debt relief measures with the G7 and China.

What Else: Sri Lanka is not alone. The number of emerging market countries with sovereign debt trading at distressed levels has more than doubled this year to 19, according to Bloomberg data. That leaves $237 billion due to foreign bondholders in uncertain territory. Investors have already pulled $50 billion from emerging market bond funds this year, the most severe net outflows in at least 17 years, according to JPMorgan data.

Consumer Credit

Car Loan Payments Are The Most Ever, Sometimes at Mortgage Levels

At this rate, nobody is going to show any interest in loans.

The average monthly payment on a new car loan hit a record high of $686 in June, according to new data from auto sales site Edmunds, up 4% from January and 13% year-over-year. With it, the risk of delinquency has risen dramatically.

Thousand Dollar Stare

Call it a case of double whammy. A shortage of new vehicles caused by pandemic-era supply chain backlogs drove up car prices — in May, the average transaction price of a new vehicle was up 13% YOY to $47,148, according to Kelley Blue Book. On top of that, interest payments are higher because the Federal Reserve is engaged in a rate-raising duel against inflation — the average annual rate on a new-car loan last month was 5.2%, up from 4.4% in February, according to Edmunds.

In short, that explains why some monthly car payments are on par with the rent for a tiny studio apartment, and why more drivers are missing payments:

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A record 12.7% of people who took out a loan on a new car last month agreed to a monthly payment of at least $1,000, according to Edmunds. That is nearly double the 7% from a year ago, and more than six times the 2% in 2010.

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Lucky Lopez, a car dealer who specializes in repossessed vehicles, told Barron's that the share of subprime auto loans that end up as repossessions has almost doubled since 2020 to 11%. Overall, 5.36% of subprime auto loans were severely delinquent in May, 138 basis points higher than a year ago, according to Cox Automotive. Even more concerning, Lopez said, is that prime repossessions (where borrowers have high credit scores) is at a 4% rate, double the usual 2%.

Reverse Gear: While fewer car loans are being taken out because of the economic slowdown, the people who are taking out loans are strapping on more debt, according to Equifax. The 6.8 million auto loans and leases taken out this year as of May were 8.9% less than the last year, but totaled $201.5 billion, a 7.6% increase in balances.

Professor's Bad Grade: According to the Cox Automotive/Moody's Analytics Vehicle Affordability Index, which measures a median household's ability to pay for an average-priced car, as of May it took a record 40.6 weeks to buy one. So the second you own it, there'll be a new model out — now you know how Apple computer owners feel.

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Food

Inflation is Everywhere, But Some Grocery Items Are Getting Hit Worse Than Others

(Dairy and cheese aisle at a grocery store; Photo by Jeremy Eades)

Keto, Whole30, intermittent fasting. Chances are you've heard about or even taken a shot at one of these trendy diets in recent years.

But now a new diet is entering the mainstream: the inflation diet. Despite rising prices slamming seemingly every aisle at the grocery store, the cost of a handful of items has remained surprisingly stable.

Trader Woes

News of rising food costs is first delivered via your weekly grocery receipt, not The New York Times. Between May 2021 and May 2022, prices for "at-home" foods increased nearly 12%, according to the US Bureau of Labor Statistics (BLS). That's the biggest 12-month increase since 1979.

Still, redrafting your grocery list can help you avoid the worst of inflation — and maybe make a few healthy choices along the way:

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The price of meat is up over 12%, while chicken is up over 17%, and eggs — once the cheap, easy-to-cook meal of choice for bachelor pads everywhere — are up over 32%, according to BLS. Fruits and vegetables, comparatively, are only up 8% in the past year, with tomatoes only up 2% and strawberries now often cheaper than a year ago — time to get creative with salads.

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Java prices are up over 15% across the nation, according to BLS, but tea prices have remained relatively stable. It may be time to swap that Americano for a nice Earl Grey.

High-Costco: Even Costco — which infamously has gone to extreme lengths to keep its rotisserie chicken selling at only $4.99 — is buckling against the weight of inflation. Last week, the bulk box-store increased the prices of its food court's chicken bake one dollar to $3.99, and a 20-ounce soft drink from $0.59 to $0.69. Thankfully, free samples remain free.

Extra Upside

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Everything from debit cards to 911 calls were blacked out for an entire day for millions of people when one of Canada's three major telecoms had a near-total systems failure because of a maintenance update.

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Leaked documents show Uber used a "kill switch" to vanish records and avoid regulator scrutiny during raids.

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