On The Agenda

1. Will student loans be the next financial crisis?

2. Debt cycles and “catastrophic deleveraging” ^LUMINARY

3. Keep the dealer from taking advantage of you

4. What to do when friends and family ask for money ^LUMINARY

5. A guide to Jerome Powell’s comments at Jackson Hole

6. What are the “structural shifts” in the global economy? ^LUMINARY

Will student loans be the next financial crisis?

From Nate Hoskin, Founder & Lead Advisor

We are officially in a bull market and the S&P 500 is up over 18% this year. The labor market is strong and unemployment is still at an all-time low of 3.5%.

But these numbers don’t tell the whole story. In fact, more people are working two jobs, so the level of employment may show that people are feeling more stressed financially and working more to try to stay afloat. It also doesn’t account for people permanently leaving the workforce, but it does include retirees returning to work because their savings didn’t go as far as they had hoped.

Long story short, record employment and over-employment might signal Americans’ distress, not their comfort.

Credit card debt is at an all-time high with almost a TRILLION DOLLARS and defaults are rising. This isn’t just a one-off, credit card debt has risen every single quarter (except one) since the beginning of 2021.

This might mean we are nearing an inflection point in the short-term debt cycle where people have been spending more through debt, but now they will have to spend less because of their debt payments.

When this happens, we enter a “deleveraging phase”. When Americans are so bogged down by debt that they can’t afford much else, they stop stimulating the economy and hunker down to try to keep everything together. This causes the economy to contract and potentially enter a recession.

I’m taking a look at where we are in the short and long-term debt cycles in my Luminary Section.

Will student loans be the straw that breaks borrowers’ backs? According to the Federal Reserve, the average payment is $222 per month. This is higher than the average credit card payment of $181 per month.

This means a third of people under the age of thirty will lose a big chunk of their income every month. We simply don’t know how people deal with this level of inflation and student loans. It’s never happened in history, and we will see the impact of this starting today.

What a “catastrophic deleveraging” would mean for your wallet ^{LUMINARY SECTION}

Debt cycles are where people spend more than they make because they are able to use debt and then have to spend less later in order to pay off the debt.

People use debt to buy properties and go to school and then, when the money runs out, use credit cards to make ends meet.

When they are no longer able to borrow, they hunker down, stop spending, and stop stimulating the economy. This causes the economy to contract, which we usually call a recession.

Right now, it seems like we’re nearing the peak of both the short-term debt cycle and the long-term debt cycle. People have been taking on more debt than ever and now high interest rates and inflation are hammering their wallets.

Let’s think through this…

How do I make sure the dealer doesn’t take advantage of me?

From Jon Scott, Lead Author 

There is a typical stereotype around salespersons—especially car salesmen. Unlike nearly every other product or service, car sales remain one of the last sectors where negotiating is still the primary way to reach an agreed-upon price. However, there is an even more important element behind the price you agree upon with the dealer. Most consumers will finance a car with a loan, and the interest rate you receive on that loan and the chosen loan term will make a huge difference; the longer the loan, the more that interest rate matters.

How to shop around for an interest rate

Never ever accept a loan from a dealership without first checking with other lenders. If you are part of a credit union you’ll want to start there. Credit unions are owned by their members, and usually offer lower rates than banks and other lenders who are obligated to maximize their returns for investors. If you are not part of a credit union and do not want to join one, large banks typically provide loans as well. Typically banks will have requirements around the car’s model year, mileage, accident history, and any other miscellaneous requirements.

Once you find a couple of lenders, you can call the bank or go online to get prequalified and/or pre-approved. Pre-qualification is less stringent than a pre-approval. Being pre-approved means the lender is committing to providing you a certain loan amount with a specific rate so long as you meet the lender’s requirements for the car’s model year, mileage, and accident history.

Once you get some pre-qualifications and perhaps a pre-approval from the best lender, you can go shop around for cars and compare the financing terms from your pre-approval with the financing from the dealer.

The most important elements are the loan term and the interest rate. A longer loan term means a lower monthly payment (than a shorter loan term), but you’re paying for a longer period and more money in interest (as well as more money in total over the life of the loan). A shorter loan term means less interest and therefore less money paid over the life of the loan, but a higher monthly payment.

Ideally, you will want to opt for a 4 to 6-year loan, however, if the monthly payment is too much and you absolutely need a certain type of vehicle for family size and safety, work, or other practical reasons then it may make sense to accept a longer loan term.

You can read a free version of our Luminary article Guide to Buying a Car here.

What to do when friends or family ask for money  ^{LUMINARY SECTION}

Many people are struggling to make ends meet. The first place those needing money turn to for help—for good reason—is their friends and family. However, lending money to or being lent money from those close to you can cause some strain in the relationship if it is not handled correctly.

What to consider when lending money to family/friends:

A guide to Jerome Powell’s comments at Jackson Hole

From Bennett Fees, Economic Research Associate

At the well-known Jackson Hole Economic Symposium last week, many of the world’s top economists and central bankers got together to discuss the state of the world and monetary policy. Given the current importance of inflation, let’s take a look at what Fed chair Jerome Powell emphasized in his opening comments.

To start,

• Total PCE- Peaked at 7% in June 2022 and sits at 3.3% in July.

  • Similar to global trends but the volatile food and energy categories (excluded in “core” measures) can give a “misleading signal”

• Core PCE inflation peaked at 5.4% in February 2022 and fell to 4.3% in July.

  • Progress is good but there is “substantial further ground to cover”

In graph form:

Next, Powell breaks down the elements of core PCE inflation into three categories. Powell summarizes their progress as follows.

• Core goods: Has fallen sharply driven by motor vehicle deflation

• Housing Services: Has decreased recently but more is expected due to long lags in lease turnover

• Non-housing services: Makes up over half of Core PCE, but many of these services are less sensitive to interest rates and are more sensitive to the labor market which remains tight.

Again, in graph form:

So what does this mean?

1. Below-trend economic growth, though hopefully without a recession

2. The labor market will ease, meaning fewer hours worked, less wage growth, and less labor demand or more unemployment

3. This isn’t over, and Powell “will keep at it until the job is done”

What are the “structural shifts” in the global economy? ^{LUMINARY SECTION}

What are the “Structural Shifts in the Global Economy”

With the title of the Jackson Hole symposium being “Structural Shifts in the Global Economy,” it is useful to take a look at why this question might be motivated.

Take this interesting graph from the Financial Times: