The Independent Investor: The Student Loan Crisis
Student loans have now become the second-largest pile of consumer borrowing, after home mortgages. What's worse, it is the fastest growing slice of American household debt and shows no sign of slowing down.
Young Americans are going to college in droves. At the same time, the costs of higher education are at historical highs. That combination has become a lethal cocktail that could hamstring young workers over their entire life and along the way damage the overall economy.
Since the financial crisis and Great Recession over a decade ago, student loans have grown by almost 157 percent. Compare that to auto loans, which have risen 52 percent. In the case of mortgage and credit card debt, we have seen a decrease by about 1 percent.
At this point, the total loans outstanding amounts to $1.5 trillion, almost the same as this year's tax cut. If students graduate and land a good-paying job, so the theory goes, they should be able to service that debt and ultimately pay it off, even if it takes half their lifetime to do so. But, if you ask the 44 million Americans with student debt, that is not what's happening.
Many graduating students can only blame themselves for their predicament. During the financial crisis and its aftermath, many students figured going to college would provide the skills that have now become the minimum requirement to land a well-paying job. What's worse, their parents -- who should have known better -- allowed their kids to pick and choose what they wanted to study. It turned out that many of those degrees (in liberal arts, for example), failed to provide enough money to even service their student debt load. Degrees that did, like post-graduate law and medicine, required much more study, money and effort to attain.
More alarming still is the rate of loan delinquencies. It is higher than all other household debt, if we measure it by failure to pay. Over 10 percent of student borrowers have now failed to make their payments in the last 90 days or more. To put that in perspective, the delinquency rate on home mortgages stands at 1.1 percent.
Another problem with student debt is rising interest rates, which makes the cost of borrowing increase. Since the Fed started raising interest rates two years ago, undergrads have seen loan interest rates rise to 5 percent. It is even more (6.6 percent) for those who are working on graduate degrees.
Even the Fed is worried about the problem. Jerome Powell, the Chairman of The Federal Reserve Bank, explained it back in March when he testified before Congress. He pointed out that failing to pay your bills under the student loan program damages your credit. As a young person starting out, your credit rating is already shaky. Delinquencies could put you in a credit hole for a large part of your working life.
As it is, 85 percent of college students work at paying jobs just to afford what their student loans don't cover. Many of them need to live with their parents because the costs of college are simply too high to manage on their own. As this debt mounts (and it will), it ultimately starts to crimp the overall economy.
Homeownership, for example, has declined because of student debt. "Household formations," as economists like to call it, among workers between 25 and 35 years old is stagnant, thanks to overwhelming debt payments. The entire generation of Millennials and beyond are loaded down with student debt, and it is limiting how much they can spend on goods and services.
The only good news is that, unlike the mortgage debt crisis, student loans do not present a risk to the entire financial system. However, that may be small comfort to those who face a mountain of student debt repayments. My advice to parents, as well as their children, is to think long and hard before making a college decision.
If, for example, your child is not willing or capable of graduating with a degree in the hard sciences that have great job prospects (triple digit salaries), it may be much better to attend a vocational school. At least that way, the costs and debt load will be much lower and prospects for a good-paying job are somewhat brighter.
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@theMarket: Will China Be Next?
After this week's trade deal between the U.S., Mexico, and Canada, investors are waiting to see if China will now come to the table. What would it take for that to happen?
Mid-term elections could be the trigger. It wouldn't surprise me to see a deal before November — since the polls appear to favor the Democrats. Trump's tariff offensives, while supported by most of his base, are deeply disturbing to those who are feeling the brunt of foreign-trade retaliation.
Farmers, for example, and blue-collar workers in certain steel-related industries, are suffering. Many of them are also part of the 39 percent minority of Americans who support Donald Trump and his presidency. These predominantly white, uneducated voters might be swayed to vote against the GOP because of these tariff issues. That could mean a drubbing for the "Grand Ole Party" come November.
A deal with China, even one that does little but save face, might be preferable to the president and his party than a big loss in the election booths. If one examines the successful deals the president and his men have negotiated thus far, we see some minor changes in the trade terms, but certainly not the massive overhaul in trade terms we have been promised practically every day for well over two years.
Minor fiddling around with auto manufacturing content and $40 million worth of reductions in Canadian barriers to milk imports (think American farm voters) is not a major overhaul of NAFTA. We have essentially cosmetic changes similar to those announced last week as part of the South Korea/U.S. trade agreement.
It appears to me that we are simply witnessing a continuation of Trump's U.S. foreign policy of "Speak loudly but carry a tiny stick." Why should we not expect the same treatment in our on-going negotiations with China, as well as the European Community? A similar deal with China would have little to no impact on our terms of trade but would allow Trump to claim he has "solved our trade problems." It might also improve Republican chances in November.
As for the market's reaction, we celebrated with all the indexes soaring at the open on Monday. The S&P 500 Index, at one point, was just five points away from making a new all-time high. The Dow Jones Industrial Average did make a new high on Tuesday and another one on Wednesday. The other indexes were more subdued as investors sorted through the potential winners and losers of Trump's new U.S.-Mexico-Canada Agreement (USMCA).
Taking a 30,000-foot view of the markets, what I see are positive returns for six straight months. If we look back to 1928, there have only been 26 prior six-month periods with that kind of winning streak. In the month that followed these events, the S&P averaged a gain of 0.95 percent with positive returns 69 percent of the time.
Over the following three months, the index averaged a 3.92 percent gain with positive returns 85 percent of the time. There have been only five prior streaks where the index was up in each month from April through September. In those instances, the average gains were even better.
Next week, we begin the quarterly beauty pageant of earnings results for this year's third quarter. Depending on the results, we could see a continuation of the rally and a slow grind higher or, if earnings are disappointing, a sharp, short, pullback, so strap in and get ready.
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The Independent Investor: Estate Planning Is for All of Us
Here is a trick question. What did Aretha Franklin, Tupac Shakur, Martin Luther King, Jr. and Abraham Lincoln have in common? They are all famous people who died without a will.
In the case of the "Queen of Soul," she died in August leaving $80 million and according to Michigan state law, those assets should eventually be divided up among her four children. In the meantime, the entire estate must go through the probate process, which is both expensive and time-consuming.
Some other famous people who failed to prepare their heirs and beneficiaries for their eventual death are: Jimi Hendrix, Bob Marley, Howard Hughes Sonny Bono, James Brown, Prince, and Michael Jackson. Some of these unclaimed estates are still going through the probate process and could remain there for years to come.
One might assume that those with a great deal of money would make sure that their estate was protected. After all, they have the money and the opportunity to hire the expertise they needed to put things in order. Obviously, in the above cases, that wasn't true.
Therefore, it should come as no surprise that roughly 64 percent of Americans don't have a will. That number is even higher for younger people (over 70 percent for those 45-54 years old). The most common answer for those questioned is that they simply have not gotten around to it. About 25 percent just don't feel that it is urgent.
Some other reasons people procrastinate are that it is depressing to face the eventuality of your own death. Others believe that lawyers are expensive and wills and such are costly. The same people usually underestimate the worth of their assets, believing they don't have much to distribute. In my experience, for example, many of my clients fail to include their largest asset, their home, when computing how much they are worth.
Typically, a will spells out who will serve as the executor, who will receive your assets, and under what terms. If you die without one, you are considered intestate. Under intestacy laws, who gets your assets is pre-determined, according to the degree of your relationships. You are also at the mercy of whatever state and/or Federal income and inheritance taxes may be due as well as the legal expenses in settling the estate through a probate court.
At our shop, most clients go through the estate planning process as a matter of course. We make sure that every investment account that we manage has an updated beneficiary listed but there is much more to it than just that. I asked Zack Marcotte, our financial planner, how he handles new clients without an estate plan.
"For most people, I like to see they have their basics covered — a will, a power of attorney, health care proxy, and don't forget to list of beneficiaries on every account that allows it, specifically your retirement accounts and insurance policies," he explained.
"One of the biggest issues I tend to see is neglecting to update beneficiaries after a divorce, death, or other change in circumstances; so make sure you look them over once a year. These are the basics that will cover most of the gaps people are exposed to; however, you should always seek legal counsel to provide personalized advice."
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@theMarket: The Market's Last Quarter
Today marks the end of the third quarter for stocks in 2018. But it is the fourth quarter that will determine what kind of year it will be. Let's place our bets.
First, we should look at what could go wrong over the next three months. Tariffs probably lead the list. More of them, (although the dollar amount is minimal in the scheme of global trade), would be bad for sentiment within the global stock markets. Mid-term elections are a toss-up, but simply not knowing the outcome I count as a negative. Quarterly earnings results might also hold some risk for investors. And finally, the latest investor sentiment readings (a contrary indicator) are as high as they were back in January before the stock market sell-off.
Since there is no way of knowing what our esteemed president will do on the trade front, let's simply acknowledge that risk and move on. Mid-term elections are also an unknown quantity, but my bet is that the Democrats will take the House, while the GOP will maybe hold the Senate if they're lucky. In all likelihood, after a bit of volatility, the markets will move on regardless of results.
As for earnings, they may be a bit different than the pleasant, upside surprises we have become used to over the last two years. Negative pre-announcements by various companies are ticking up. As of this week, 74 out of 98 S&P 500 companies, according to FactSet, have guided lower for the third quarter. So, what gives on the earnings front?
It is simply confirmation of what Federal Reserve Chairman Jerome Powell told us this week about Trump's trade war: "We've been hearing a rising chorus of concerns from businesses all over the country about disruption of supply chains and materials cost increases."
Bottom line: you don't actually need tariffs to be implemented to impact economic growth. Trump's constant threats and tweets about what he might or might not do on the trade front is creating an atmosphere of uncertainty. Corporations are becoming more cautious, guiding down expectations, and generally delaying expenditures until they see what happens.
Right now, investors expect third-quarter revenue growth to average 7 percent, while year-over-year earnings growth should come in at around 20 percent. Sounds good, doesn't it? But those numbers are down from second quarter results of 10 percent revenue gains and 25 percent earnings growth. The fourth quarter expectations are even lower with 6 percent revenue growth expected and 17 percent gains on the earnings front.
In the past, I have discussed the phenomena of "peak earnings" and how the wonderful results of the past few quarters have been artificially inflated by one-off events. The Republican tax cut giveaways to the nation's corporations were squandered on buy-backs of shares, increases in dividends, and mergers and acquisitions, but those effects are winding down.
Despite the effort in Congress this week to make those tax cuts permanent (in hopes of propping up the markets until after the mid-term elections), it is doubtful the Senate will go along with it. Adding another $750 billion or so to the $1.2 trillion it has already cost to cut taxes this year seems to be a "bridge too far" even for a party that has abandoned all semblance of fiscal integrity.
The U.S. Advisory Sentiment data now places the bulls at 60.6 percent, the most bulls counted since Jan. 18, 2018, and the seventh straight count above 55 percent. Usually, readings above 55 percent indicate caution. Over 60 percent signals elevated risk and the need to take defensive measures.
On the surface, all these arguments should set us up for a bear market in the last quarter. However, every one of these arguments has been around for at least the last three months and look what the markets have done. The Dow is up 9 percent, the S&P 500 Index up 7.5 percent, and NASDAQ gained 7.7 percent. Bottom line: the markets have shrugged off the negatives and moved higher. Why should the fourth quarter be any different?
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The Independent Investor: Credit Freeze for Free
It just got cheaper to freeze your credit files, thanks to the Economic Growth, Regulatory Relief and Consumer Protection Act. But should you do it?
The law, signed by President Trump back in May, only took effect this month. It requires the three major credit reporting bureaus — Equifax, Trans Union and Experian — to drop the fees to freeze your credit. Those fees ranged from $3 to $10 per person, times three credit bureaus, plus more charges to "thaw" your credit. Consumers can now also un-freeze their files, either temporarily or permanently, free of charge.
Thanks to a recent spate of credit breaches, Congress felt it needed to do something about the problem. Readers may recall last year's credit breach at Equifax and its aftermath. Hackers stole personal data, including Social Security numbers, birth dates, addresses and even some driver's licenses from an estimated 143 million people in the U.S. Another 210,000 credit card accounts were also at risk. To make matters worse, the company knew about it, but kept quiet for some time before revealing it to the public. There had been a flurry of hearings, investigations and demands from both sides of the aisle to do something about it. Then there was the Yahoo breach in 2016, where over one billion users were impacted. Several banks, including Citibank as well as countless department stores, have reported hacking of information for millions more users. Thus, the new legislation.
So, what exactly is a credit freeze? It is a way to protect personal information from credit fraud and identity theft. Once you freeze your account, no one can get access to your credit files to open a new fraudulent account in your name. The downside is that you can't apply for new credit, either, unless you lift the freeze using a special PIN number.
But if you have ever had the misfortune of dealing with these credit bureaus, you know how time-consuming and complicated it is to change anything at all in your files. First, you need to be able to contact them. Sometimes the robo-answering service can keep you on the line for hours. You are required to repeat this excruciating task at all three agencies and you better have all your account numbers, credit card numbers and everything else handy and documented.
Remember, too, that if you need to apply for a loan, a credit card, set up electricity or phone service, rent an apartment, buy a house, obtain insurance, even apply for a new job, you can't — until you thaw your credit file. That will mean calling back all three companies, waiting in line, unlocking your credit, conducting your business, and then re-establishing the credit freeze. Putting up with these monumental delays may well be insurmountable for many.
You could, instead, take advantage of a credit lock, which works like a freeze and is offered by the credit bureaus. The companies market it as being more convenient since consumers can lock and unlock their credit files simply by using a smartphone application. Of course, they charge you a fee for it, as much as $20 a month, and that fee can be increased (and probably will be) in the future.
Fraud alerts could be the way to go. If you believe that your information may be in jeopardy, you can notify all three credit bureaus and they will then have to verify your identity before releasing information. Fraud alerts had expired after 90 days, but the new law requires them to remain in place for a full year.
Bottom line: if you are an actual victim of ID theft, a security freeze is critical. If you think you might become a victim of ID theft (your wallet was stolen or lost, as an example) a freeze might be worth considering. If so, do not lose your PIN number. If you do, it will cost money and mountains of your time to get a new one. And finally, if you are paranoid about identity theft, consider a fraud alert. Your credit information will still be available, but creditors must take reasonable steps to verify your identity before granting you credit.
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