The New Consumer Capital Stack

One of the hypotheses we’ve had for a long time is that investors were thinking of the consumer capital stack all wrong.

Conventional thinking was that:

Home mortgage/Rent payments + Auto Payments were the two things consumers wouldn’t default on. Why? Because getting kicked out of your home or losing your car were pretty bad things to have happen.

But we’re seeing that during this pandemic, the size those payments represent of someone’s total expenses really matters. People simply cannot afford to pay them while out of a job.

Conversely, it was assumed that during hard times, the first things to get turned off are “the non-essentials.”

But as we sit here, we’re seeing a few interesting dynamics occur:

(1) Consumer debt, especially subprime consumer debt, is not performing as poorly as people expected it would by this point in the environment. It’ll get worse… but so far, not so bad. My guess is this is because: (i) people are getting deferrments on their auto loans (ii) people are getting deferments from their landlords, (iii) people are not spending much money right now because they are not going outside (iv) it’ll take time for layoffs to affect people’s pay and (v) unemployment benefits right now are so good, that many subprime consumers are taking in as much monthly cash as they were before, so they can pay off their smaller loans.

(2) Churn on consumer subscription products is not increasing. Churn has always felt similar to a “default” for us. And SPOT, Netflix, etc are not seeing people turn off their subscriptions.

Spotify Churn Looks Stable


Ultimately — we think much of this dynamic has to do with: “cost per utility.” I’ve long believed my iPhone was the cheapest thing I owned. The price I paid for it compared to my general usage of it is insane. Compared to a car? It’s a way better deal. Spotify is probably the second cheapest thing I own, and so on…

And so as we think about what payments consumers are likely to pay off first, it strikes us that rent and auto, the two “top of the stack” payments are likely to see the most suffering in the short term (credit card payments too) and smaller, high utility payments are likely to remain “more” stable.