by Peter Reagan
Even the ultra-wealthy are pulling back on spending – skipping luxury cars, scaling down college perks and trimming travel. When the richest Americans cut spending, it’s not a necessity, it’s about caution. Here’s why that’s a warning for everyone…
A question for the “little guy,” the average Joe: What would you do differently if you were one of the highest earners in America?
Would you live in a different house? Would you take a different vacation? Wear different clothes, have different jewelry? How about how you take care of your kids when they go off to college. Would you do that differently?
If you’re like most people, you answered yes to nearly all of those questions. And why wouldn’t you? If you have the extra funds, you can live life differently than middle or lower income Americans.
Which is why recent news coming in from luxury brands… the brands catering to high income earners… is cause for concern.
What is the recent news?
The news coming in is that luxury brands are having to scale back production, but not because of supply chain issues (this isn’t a rehash of the COVID years).
No, they’re scaling back production due to decreased demand.
That’s right, high income earners are cutting back, not spending as much for luxury goods.
But don’t just take my word for it. Take this recent story:
Uncertainty around tariffs has caused even the wealthiest buyers of Lamborghini supercars to hold off on their purchases, CEO Stephan Winkelmann told CNBC.
That’s right, the very wealthy (who else can afford a Lamborghini, after all?) are holding off on putting out what, for many of them, isn’t a huge portion of their wealth on these kinds of luxury cars.
And you may say, “So what? How is that any different than you or me if we wait a little while to save up for a down payment on a new Toyota or Honda?”
And the answer is that this is a very different situation.
Why the wealthy love Lamborghinis
Very high income earners don’t buy Lamborghinis for the same reasons that the average American buys a vehicle.
You and I buy a new vehicle typically because we need it. We need it to commute to and from work. We need it to get the kids to and from school. We need it to get groceries.
A vehicle is mostly a practical decision on the part of the average American, and the details (trim packages, etc.) are the only (small) variations.
In contrast, no one buys a Lamborghini because they need it!
These vehicles are luxury purchases. They buy Lamborghinis for reasons such as to present an image to others, to fulfill a dream (what guy didn’t dream of owning a race car as a child?), or for some other similar reason.
And unlike average Americans when they buy vehicles, Lamborghini buyers are making that purchase out of the extra funds that they have.
It’s discretionary spending at a level that the vast majority of Americans don’t have.
Of course, maybe the cutback in spending is only for Lamborghinis. Maybe people who are inclined to buy barely street legal cars costing six figures are changing their vehicle buying habits to other things such as making sure that their college aged kid isn’t living in a hovel while at school.
If that is what you think may be happening, then, you’ll have to reconsider that thinking because…
Cutting back on college expenses
High income earning parents of college aged children may have put those children up in luxury condos with all of the amenities while at school in the past.
But they’re less likely to do that now. At least, that’s what the leasing companies are saying. According to this recent report:
Consumers are increasingly concerned about the state of the economy, and that is affecting yet another real estate sector — student housing.
Olick continues:
“What we’re seeing is fall-off at the top and the bottom [of the student rental housing market],” said Robert Bronstein, founder and CEO of Scion, one of the country’s largest owners and operators of student housing.
That’s right, even their kids are having to live a bit more modestly than before. That means no more rooftop hot tubs for them while at college (that really was one example given by Bronstein!)
Why? It all comes down to dollars: “High-end amenities, [Bronstein] said, no longer drive occupancy. Cost savings are now paramount.”
That’s right – for the wealthiest American families, today, cost savings are paramount.
They don’t need to watch costs closely – they’re wealthy! They’re already sending their children to Ivy League schools for $85,000-$95,000 a year. Yet they’re pinching pennies!
Most families are pretty happy that their child is able to be a full-time student at the local state college and that it can be paid for with student loans.
The average American wasn’t buying a rooftop hot tub for their college student anyway. Only very high income earners, those who make quite a bit more than they need for basic needs, were the ones making those purchases.
And they’re cutting back, too.
The canary in the coalmine
If you’re wondering what all of this means for you, consider this:
Very high income earners and the ultra wealthy are the ones who can and do spend even when the economy is hurting.
Even when the average American can barely make ends meet, the wealthy can still afford to buy mansions, exotic luxury cars and rooftop hot tubs for their college students.
But not anymore.
And keep in mind that high income earners are almost all either highly placed executives in large companies or business owners. They will be the ones who will always be the last to need to scrimp and save and cut corners
When they cut back on discretionary spending to be cautious? We should consider it to be a very bad sign for the economy in the weeks and months ahead.
There’s one thing the wealthy aren’t cutting back on, though. They’re choosing to buy gold at an astonishing rate. Earlier this year, Bloomberg published a report called Gold Is So Popular It’s Making People Nervous. Then there’s the 13% increase in physical gold bullion demand this year, and the news that money managers expect gold will be their top-performing asset in 2025.
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