Today we discuss the looming $1.5 Trillion in outstanding loan debt that is coming due very soon. There are problems with this, of course, which is why I am writing about it. The problems include some difficult issues with payments, payment terms, and overall servicing responsibilities. In addition, many students who took the loans cannot afford to pay them back because they did not get the jobs they were expecting in this economy. Further, the student loan forgiveness program the government hoped would solve the problem was recently rejected by the Court. What happens next? We discussed that in us
Story of the Week.
Gold and Silver Analysis
This week I am not going to post the gold and silver charts for the reason they have not changed much. Both metals have slumped slightly this week, but from a technical perspective on the charts, there is not any reason for concern. They are both trading within established ranges. Truth be told, both metals have held up admirably this summer and I will start to get worried if gold begins to crash consistently down for more than a day or two.
This week I want to focus more on the fundamentals of the markets. We know that silver is in a yearly supply deficit in 2023 and has been that way for the last few years. Mines do not produce as much silver as we need, and any pending decline in global economic output will adversely affect the fresh supplies of silver.
This is because over 70% of silver is produced from OTHER mines such as copper, lead, zinc, and gold. When economic demand falls, so does the output from those mines. This dynamic will only lead, over time, to available above-ground silver supplies becoming more strained and leading to a supply-driven price spike. This may not be imminent, but we are getting closer to the point at which the silver supply/demand scenario cannot be ignored by markets anymore.
Gold is in a bit of a different position. While central banks are buying it hand over fist, most gold mined over history is still with us in the form of jewelry, bars, coins, or investment-grade stocks sitting in warehouses. Any substantive financial shock around the world turns gold into the asset of last resort. This will lead to a stampede of physical gold which will spike the price. The long-term fundamental of both precious metals is decidedly bullish, and that is really all I need to know at this moment.
What is also telling is that the cryptocurrencies such as Bitcoin, Ethereum, and Litecoin have not fully recovered from the recent ‘crypto winter,’ a term describing the recent fall from grace for the cryptocurrency complex that has not yet recovered to its previous highs. Bitcoin is trading at about half of what it was at its peak not that long ago. Add in the fact that Millennials in the US are investing more of their portfolios into gold, through the form of ETFs like GLD, and it does not appear Bitcoin is going to storm back quite yet.
I fully expect demand for cryptocurrencies to surge again during the next recession, especially in Asia, but likely also around the world as well. But for now, it is the precious metals that have predictably re-taken the crown of ‘crisis asset’ of last resort for investor portfolios.
We will return to our normal technical analysis of the precious metals markets very soon. But at the end of the day, it is the fundamentals of the market that drive the technical indicators and not the other way around.
The Macro View
US manufacturing continued its baby bounce from last week. The Chicago Business Barometer index inched forward about 3% as the index feels slightly more positive about the industry in the past month. The ISM manufacturing index, a national indicator, inched forward just under one-half of one percent. However, construction spending in the US fell about 0.6% this past month as compared to the last one before it.
The big report this week is on jobs. The US non-farm payrolls report had 188,000 new jobs; a meek print fairly small compared to economists’ expectations. Earlier this week, the ADP private payroll report showed the US adding 324,000 jobs, much less than last month’s 455k private jobs added. Employment isn’t surging but can be more aptly described as inching forward ever so slowly, all things considered.
US productivity measures surged by 3.7%. I call that a surge based on the fact it was a reversal of the negative 1.3% reading from a month ago. That is a 5% swing in one month which is quite honestly a refreshing piece of news for the nation’s economy. At least one indicator is flashing positive, and frankly, I will take it.
Story of the Week
This week we discuss the $1.5 trillion dollar student loan problem. According to Bloomberg, six Democratic senators wrote an open letter to the nation’s student loan servicers explaining the current issue with servicing loans for current and former students. The first issue deals with massive problems in getting borrowers and loan servicers matched appropriately.
The problem started with the current federal administration promising student loan forgiveness, only to be shut down by the Supreme Court, which rules that the President exceeded his executive authority. Loan servicers apparently were not prepared to deal with the abrupt reversal of policy, and it has created problems. Those Senators wrote the following about the problems that borrowers and servicers face now.
“That said, the biggest risk to borrowers — assuming they can avoid outright scams — might be time wasted on the administrative hassle related to setting up their accounts and choosing a repayment plan. Loan servicers want to go full speed ahead, but they’re concerned there isn’t enough time to communicate with borrowers. Servicers process payments and help struggling borrowers figure out repayment plans.”
Bloomberg, reporting on the dire nature of the situation, provided the following summary.
“Logistics is daunting. Many borrowers were assigned new loan services after some of the biggest companies, such as Navient Corp., quit the federal program. The Biden administration’s failed attempt to forgive some of the debt has left some folks confused about whether they need to pay at all. Then there’s bewilderment over income-driven repayment plans and the legions of scammers sure to be looking for easy marks amid the upheaval. It could be a mess.”
A mess indeed! And despite the problems servicing loans may cause to the timely repayment of this $1.5 trillion in student loan debt, we have an even deeper problem than that.
According to a study by Morgan Stanley Research, a large subset of current borrowers either cannot pay off their loans or must sacrifice spending on other things to do it. For example, the following graphic from Morgan Stanley outlines how 34%, slightly over a third, of current borrowers simply are not going to be able to make their payments.
As you can see in the graphic, the lower income groups will logically have more issues paying back their student loans, while those of higher means can move money around to make their payments. Those higher income groups can reduce payments on other things. At first glance, this seems to be reasonable and while alarming, does not indicate an existential looming crisis just yet. But diving deeper into the data reveals something quite a bit more concerning.
You see, the middle section of the chart highlighted in light yellow indicates the proportion of borrowers that must cut back, or completely stop, spending on other areas. And this percentage of borrowers increases the further we go up the income strata. Meaning, some other part of the economy is going to have to suffer across the board.
This is what we call the second-order effect, meaning the problems paying back loans cause much deeper problems elsewhere in the economy. It becomes a clear domino effect. Those problems manifest in the retail market where Morgan Stanley researchers are very concerned over a well-known group of retailer segments they expect to get slammed as student loan forgiveness ends and the overdue debt payments must be made by borrowers.
The chart above from Morgan Stanley calls out those retail segments that will be hit hardest, and it pretty much covers everything above subsistence-level spending. What I mean by that is people will always buy necessities like food, clothing, and auto parts so they can work. But they are going to focus that spending on the lowest cost options, stripping spending on mid and high-grade retailers such as Target and Dick’s Sporting Goods, among many others.
Those companies are facing a severe decline in spending on top of the decline in sales we expect to occur as the next recession occurs either late this year or early in 2024. In other words, the retail segment of the economy is about to get double-whacked. And consumer spending makes up a robust 72% of the economy, for purposes of judging the severity of the looming problem.
But you know me well enough by now to know what I am going to say. Wait, there is more! The following graphic from the Consumer Financial Protection Bureau indicates that loan defaults for borrowers on other credit products is already surging ahead of the termination of the student loan forgiveness program. Meaning, borrowers were already having a hard time making ends meet BEFORE the student loan obligations are restored and payments must commence to loan servicers across the country.
Current student borrowers had already begun defaulting on other credit products, which typically include mortgages, auto loans, credit cards, and other forms of revolving credit. Ouch. Add back in monthly student loan obligations on top of the existing escalating credit problems, and the youth of the nation are facing an existential crisis.
What happens with the next recession hits and layoffs begin? The situation is already dire for former students now and it will only get worse when the inevitable job layoffs come during a recession. The dominos are falling down the line, with the final stop being the banks. That is right, we are back to the potential bank failure conversation we just recovered from this past spring. In case you forgot, the US suffered the 2nd, 3rd, and 4th largest bank failures in history just a few short months ago. How many will fail this time around with $1.5 trillion in student loan obligations under serious stress?
Executive Summary
The precious metals are doing just fine this summer. Economic fundamentals point to higher prices in the fall, though we could see some short-term weakness as summer casually blends into fall and students begin to make their way back into schools. Parents then turn back on their investment activities and increase their active investing strategies.
Economic fundamentals are tepidly improving but not enough to move the needle meaningfully. Impending recession concerns would seem to be bullish for the metals. Former students struggling to make ends meet are in serious trouble as their loans become due after a botched debt-forgiveness program thrust the national servicing market into a crisis.
As loan payments come due, the retail sector of the US economy will get hit particularly hard. Ultimately all these problems lead to the porches of US commercial banks who look to get hit hard a second time in relatively short order. How much of this can the US banking sector take before we reach another Lehman-style bankruptcy scenario?
Coin of the Week
For those on a budget, these fractional silver coins are a good choice. They typically come with higher premiums but work well for people on a strict budget.
