"Delinquency Is At Crisis Levels" - Student Loan Bubble Is About To Pop

According to a new Bloomberg Report, the student debt crisis is about to take a turn for the worse, as the next generation of millennial graduates could be trapped in insurmountable debts. 

Over the last decade, the federal student loan segment experienced an explosion in growth. 

As the cost of college soars, the result is a widening default crisis that even Fed Chairman Jerome Powell recently warned: Burgeoning levels of student loan debt could slow down economic growth over time. 

Millennials have frantically tapped into student loans, up almost 157% in cumulative growth over the decade. By comparison, Bloomberg notes that auto debt has grown by 52% while mortgage and credit card debt fell by 1%. Student Loans Owned and Securitized, Outstanding has breached the $1.5 trillion level under the Trump administration, making it the second largest household debt segment among all Americans, after mortgages. 

Analysts warn that a perfect storm in the student loan bubble is brewing. They say student loans are being issued at unprecedented rates as millennials are conditioned to believe that higher education is the only way to get ahead. This comes at a time when tuition at both private and public institutions is at record levels, and interest rates on loans are surging to fresh cycle highs. 

As the storm clouds gather, the next generation of graduates could default on their loans at even higher rates than today, which would ultimately form a turning point in the bubble and usher in a winter cycle. 

"Students aren't only facing increasing costs of college tuition; they're facing increasing costs of borrowing to afford that degree," said John Hupalo, founder and chief executive of Invite Education. "That double whammy doesn't bode well for students paying off loans." 

Bloomberg Global data analysis of federal loans shows student debt has the highest 90+ day delinquency rate of all household debt. 

Americans who attended for-profit universities and community colleges make up 70% of all defaults, said Judith Scott-Clayton, a Columbia University associate professor of economics. She said that poor working class folk were suckered into worthless degrees, with the promise of a better job, but it only left them with high debt loads. 

Scott-Clayton notes that delinquencies skyrocketed in 2011 to 2012 academic year, reaching almost 12%. This year, the rate remains near cycle highs, which she attributes to social and institutional factors rather than average debt levels. "Delinquency is at crisis levels for borrowers, particular for borrowers of color, borrowers who have gone to a for-profit and borrowers who didn't ultimately obtain a degree." 

Hupalo said: "There's a systemic problem in the student loan market that doesn't exist in the other asset classes...Students need to get a job that allows them to pay off their debt. The delinquency rate will rise as long as students aren't graduating with degrees that pay back that cost." Those most at risk of delinquency tend to be, college dropouts and for-profit graduates, who struggle to find good jobs that allow them to pay off their balance. 

To make matters worse, the Federal Reserve continues to reduce its balance sheet, known as quantitative tightening, along with hiking the federal funds rate, now at 2.25%, which has forced borrowing costs higher in the last several years. 

Undergraduates have seen interest on direct subsidized, and unsubsidized loans breach 5% in 2018 -- this is the highest rate in almost a decade, according to the US Department of Education. 

"If you're in an interest-based plan, you can see costs go up, which worries me for students who are in school and have seen debt go up before they've even finished," Scott-Clayton said.

In the next economic downturn, which could be late 2019 or sometime in 2020, the student debt bubble could experience a surge in delinquencies.  

Earlier this year, Powell warned Congress of the bubble risks: 

"You do stand to see longer-term negative effects on people who can't pay off their student loans. It hurts their credit rating, it impacts the entire half of their economic life," Powell testified before the Senate Banking Committee in March. "As this goes on and as student loans continue to grow and become larger and larger, then it absolutely could hold back growth."

2018 has been a rough year for millennials, as they struggle to pay back their debt obligations. Student debt has prevented some from having children, owning a home, or even believing in the American dream. 16% of millennials age 25 to 35 lived with their parents in 2017, up 4% from a decade prior, according to Bloomberg Intelligence. 

"You have a whole generation of people that have a significant amount of student loans and its crimping demand for other goods and services," said Ira Jersey, the chief US interest rate strategist for Bloomberg Intelligence. "As people live with their parents or cohabit with a non-partner, millions of houses and apartments aren't being purchased. Neither is WiFi or that extra sofa. We think this is having a significant impact on the economy."

While Wall Street and the Trump administration tout news of a roaring economy and low unemployment, the risks of the student loan bubble imploding in the next economic downturn could start in the second half of 2019. 

A real economic barometer of millennials' financial health is to monitor the student loan delinquency rate, which, as of today, shows it is near cycle highs. A sign that storm clouds are gathering. 

***

Heavily indebted millennials might have a shot at paying off their student debt via a new game show on TruTV called “Paid Off.” Contestants must have lots of student loans and could have the chance to answer trivia questions – and if they win, the game show will pay off their student debt. Fonte: Z.H.

Fed Should Buy Stocks In The Next Recession: Former IMF Chief Economist

Our economy’s journey to becoming Japan will take one giant step forward if former IMF chief economist Olivier Blanchard has his way. His "outside the box" solution for our next recession? The Fed should buy stocks, finance the federal deficit and buy goods. He detailed this thought provoking idea at the Boston Fed’s monetary policy conference that took place this past weekend.

This thinking comes as a result of a "general sense [that] the Fed has to re-think its approach to combating recessions," according to a new MarketWatch article.

Why must it re-think its approach? Because the Fed itself has eliminated most of its tools used to fight recessions by keeping the United States in a lower interest rate environment for too long, instead of raising rates as the market roared. Now we have a stock market at all time highs and record debt levels yet again - but this time with a Federal Reserve that has far fewer options to combat the next recession than it ever has had in the past and with a neutral rate of interest that is lower than it has ever been in the past.

Fascinatingly enough, economists are only now starting to realize that this lack of firepower could be a detriment to the Federal Reserve in the future. Blanchard stated over the weekend that the Fed could probably handle a small recession, but a more major recession, like the one we experienced in 2008, should prompt the Fed to resort to "previously unheard of policies".

When interviewed by MarketWatch, Boston Fed President Eric Rosengren stated that he wasn’t sure there would be support for this type of monetary policy, as Blanchard was describing it. We'd be interested in revisiting his answer in the midst of a crisis. 

Rosengren went on to say "We definitely have tools. The question is whether we have the sharpest tool in the shed and whether we’re going to be able to deploy them."

Allow us to be the first to guess that they do not have "the sharpest tools in the shed", in more ways than one. 

Apparently convinced that two wrongs do in fact make a right, Rosengren then stated he would be "a strong advocate" of QE the way that we know it best: asset purchases and rate cuts. Such a cavalier attitude about this type of damaging monetary policy belies the larger problem of the Fed's balance sheet, which stands at over $4 trillion with no signs of lightning up in any material way.

But Blanchard doesn’t seem to think that this $4 trillion dollar balance sheet is even a problem. "If we need it, we could clearly double it and nothing terrible would happen," Blanchard reportedly said.

He concludes that he is not sure why people believe the Fed should only buy assets, but not goods.

“We have this notion that it is only OK for the central bank to buy assets and not goods. But that’s a restriction we imposed on ourselves,” Blanchard is quoted as saying.

Yes, how bizarre that the Fed doesn't buy, say, baseball cards to boost the "wealth effect" at the card collector level, or maybe Tesla Model 3s, just because.

Of course, Neither Blanchard nor Rosengren seem to realize that the reason we are in a place where central banks had to buy $15 trillion in assets to begin with is because the Fed and this type of thinking has put us in to begin with. What will this discussion look like in another 10 years, after the next crisis? We don’t know, though we are sure every problem we'll be dealing with by then will be exactly what we deserve. Fonte: qui

US Consumer Credit Hits All Time High As Credit Card Usage Stalls

Two months after a near record surge in consumer credit driven by a spike in credit card debt, the US consumer went into a period hibernation to start the summer, when total consumer credit rose by just $8.5 billion in June, with revolving, or credit card debt posting only its second contraction since 2013. Then moments ago, the Fed reported that in July, consumer credit posted a solid rebound, rising by $16.6 billion, above the $14.4 billion expected, and bringing the total to $3.92 trillion, a 5.1% annualized increase from a year ago, and a new all time high.

Of this increase, the bulk was from non-revolving credit, or auto and student loans, which rose by $15.4 billion to a new record high of $3.92 trillion, while revolving, or credit card, debt posted a minimal $1.3 billion increase, barely offsetting the June decline, if enough to also bring the total revolving credit to a new all time high of $1.04 trillion.

In other words, while Americans continue to spend on cars and college, they were far less enthusiastic about charging everyday purchases on their credit cards.

And while the recent flatlining in credit card debt will prompt questions about the resilience of the US consumer during the summer, the recent dramatic upward revision to personal savings notwithstanding, one place where there were no surprises, was in the total amount of student and auto loans: here as expected, both numbers were at fresh all time highs, with a record $1.532 trillion in student loans outstanding, an increase of $8 billion in the quarter, auto debt also hit a new all time high of $1.131 trillion, an increase of $18 billion in the quarter. Fonte: qui

Subprime Chaos: The Auto Bubble's Bursting And The Data Is Worse Than 2008

Last week, used car prices had their biggest drop since 2009 – directly after the financial market meltdown of 2008.

Right now, the auto market is showing signs of incredible worry.

Delinquent subprime auto-loans are higher than they were in the last recession.

Look for yourself...

What’s interesting – and worrisome – is that consumers are defaulting on subprime auto loans when the economy is reportedly doing ‘very well’.

Like I wrote last week – there are cracks under the economy’s foundation. And it’s like a bucket of cold water in the face of the mainstream financial media that’s pushing the ‘growth’ story.

We must ask ourselves – “if things are going so well, why are subprime loan delinquencies at a 22-year high?”

I can’t help but feel a bit nostalgic. This was the same situation that led up to the 2008 housing crisis. . .

First, there was massive growth in mortgage-backed securities and mortgage debt. Then, the Federal Reserve – led by Alan Greenspan – began aggressively raising rates after years of low rates. Soon after, subprime loans started blowing up – which trickled into the prime loans. And eventually, everything was in chaos.

Using the often-ignored Austrian Business Cycle Theory (ABCT) – coined by the little-known but brilliant economist Ludwig Von Mises – I am blaming the Fed for all this.

Thanks to the Fed, a near decade of zero-interest rate policies (ZIRP) and three rounds of Quantitative Easing (which totaled over $3.8 trillion in printed money) – the consumers became hooked on cheap auto loans. . .

Their policies made the entire system fragile by getting consumers addicted to cheap debt through their easy money.

They then began tightening credit – crippling the borrowers.

Think of it this way – imagine you’re addicted to alcohol. And your bartender keeps giving you cheap drinks each night for months. Eventually, from drinking way more than you should’ve been able to afford, you now have a very high tolerance.

But suddenly – the bartender becomes strict and starts giving you less booze. He tells you, “sorry but no more free alcohol for you.” Problem is, you wouldn’t have drank so much if you had to pay full price for it.

Now you’re left with awful withdrawals – scrounging together all the extra money you can just to pay for a drink. But the only way you can really afford to feel better is if he starts giving out free drinks again or you painfully detox.

Just look at the collapse in auto-loan growth since 2015 – when the Fed began tightening with their end of QE and talk of rate hikes...

Clearly the higher rates had an impact on new auto loans.

But a bigger – and more pressing – problem is that the Fed’s short-term interest rate hikes are making these current subprime auto loans unserviceable. The borrowers are having a harder time paying more interest for an asset that depreciates 15% the moment they take it off the lot.

Clearly, affordability is becoming a problem. . .

As I learned from Ludwig Von Mises and the other brilliant Austrian economists – the Fed created a bubble in auto-loans by keeping rates low and printing trillions. And now they’re going to blow the whole thing up with their rate hikes.

Just like taking the free drinks away. . .

I expect delinquent subprime loans to keep hitting new highs. And I expect the ‘growth’ story the pundits keep pushing down our throats will fade.

Because even if the auto-loan industry and general economy hasn’t rolled over yet, each new Fed rate hike pushes us one step closer to the edge.

0.25% at a time. . .

So, with our Macro-Fragility Index (MFI) alarmingly high in the auto sector – I’m going to spend time looking for opportunities here.

History shows us that when things start their descent into collapse – the subprime market is the first to get hit.

Food for thought. . .

Authored by Adem Tumerkan via Palisade Research

"What Is The Magic Number?": Wall Street Answers The Most Important Question For Investors Today

In its latest Fund Manager Survey, Bank of America asked what may be the most important questions for investors today: "What level of US 10y Treasury yields would cause you to rotate from equities into bonds?"

That level, which Bank of America's Michael Hartnett has repeatedly dubbed the "magic number", rose from 3.5% last month to 3.6% in the May survey, and represents that weighted mid-point of the responses by the 223 survey participants, who manage a total of $643BN .

As a reminder, last week Hartnett explained why he agrees with the FMS response, saying "it should not be a surprise if reallocation starts before yields get to 3.5%. Indeed, as we breached 3% the following asset classes all suggested that the 3-3.5% range would become “painful” if not accompanied by much stronger economic data."  As the BofA CIO further added, banks, homebuilding stocks, US dollar, EM, yield curve all suggested 3% on the 10-year Treasury yield was the "magic number."

• Lower US bank stocks: rise in rates was shifting from a “good” rise to a “bad” rise (financials underperformed utilities by 1250bps since mid-March)
• Lower US homebuilding stocks: a good lead indicator of interest rates, homebuilding stocks are saying the Fed is making a “policy mistake”

Then, yesterday, as 10Y yields broke out to fresh post-Taper Tantrum highs, rising above 3.05% and as high as 3.09%, a level not seen since 2011, Bill Gross tweeted that "the Economy can't support yields higher than 3.25% for 30s and 10s, nor 3% for 5s. Continuing hibernating bond bear market is best forecast."

And, as we also showed yesterday, demonstrating the recent sharp drop in loan demand across the board as a result of higher rates despite far easier lending conditions, and affecting everything from C&I loans...

... to residential mortgages...

... to consumer loans...

... Gross is right, only the Fed hasn't quite realized yet that US interest rates are now at a level that leads to not only lack of loan growth, but outright deleveraging, loan destruction and thus, deflation.

To underscore his point, Gross also noted the technicals and said that "30yr Tsy long-term downward yield trendline for the past 3 decades now at  3.22%, only ~4bps higher than today's yield." Asking rhetorically, "will 3.22% be broken to upside?" his answer was no.

Then, overnight, another bond titan - and Gross' former employer - Pimco also agreed with the "magic number" consensus, when its co-head of Asia-Pacific, Robert Mead, said that 10Y yields will move in a 3% to 3.5% range for the rest of the year as the Federal Reserve continues raising interest rates.

Addressing the second longest US economic expansion, and second oldest business cycle in US history...

... Mead stated the obvious to the Bloomberg Invest summit in Sydney: "we do think this hiking cycle is quite well advanced." adding that while "the backdrop of the U.S. economy has been pretty strong and going for a long time. At some point we will find these high yields will become an impediment for growth.”

As the charts showing negative loan demand above suggest, that point is now.

Mead then said that the higher rates rise, the more the record short overhang will, or at least should, be unwound: “Nothing is pound-the-table cheap,” but rising yields mean investors can gradually reduce their underweight bond positions, Mead told the Bloomberg conference.

Confirming this observations, Mark Delaney - the chief investment officer of AustralianSuper Pty, the nation’s largest pension fund - said he was thinking about buying bonds again after selling almost all holdings last year.

"We sold almost all our bonds in 2017, but now they’re a percent higher - a percent plus, a bit higher - we’re starting to think about whether or not we should start closing those short positions," Delaney told the Australian summit.

It's not just positioning however, and the inevitable short squeeze: according to Jeffrey Johnson, head of Asia-Pacific fixed income at Vanguard Australia, inflation will remain anchored due to the global secular deflationary tailwinds: 

Powerful forces such as demographics, globalization and technology should keep a cap on yields, Johnson told the summit.

Putting that in numbers, Johnson said that the fair value for U.S. 10-year yields would be 3% to 3.25%. And as evidence, he added that Vanguard has seen evidence of investors getting back into fixed income to take advantage of the higher yields.

Ultimately, it will be up to the pension funds of the world, most of whom are significantly underinvested in fixed income having rushed into equities in recent years, to be the marginal buyer that pushes rates decidedly lower, especially if the Fed indeed plans to hike at least another 3 more times this year, in which case if Wall Street is right, it would be the Fed itself that inverts the yield curve.

But there's time before that happens. For immediate next steps, just keep an eye on the value of the US Dollar: should the recent torrid rally finally fizzle, that will be the time to go long bonds. Fonte: qui