Paper Chase: Student Loans
June saw unemployment fall to 6.1% which is the best since April 2008. The 288,000 jobs created were better than analysts predictions. The employment numbers were revised up for the last 2 months helping the Dow to exceed 17,000.
Pending home sales hit an 8 month high in May in an indication that housing is pulling out of its recent slump. The housing index is based on contracts signed increasing 6.15%.
There may have been surprise at the sheer number of jobs created because it was so robust, but the report is a reflection of what is a nice economy. We are healing from the crisis and that trend has been in place for quite some time now. The rational exuberance in the stock market was validated with this Jobs report.
The Fed Won
Rates will probably rise in 2015, but the contours of that decision should be with a declaration of success from the Fed. There are many people who thought the Fed would not be successful or effective when it has in fact been both. We have good job growth, the unemployment rate is down, and won the war against inflation. The Fed should not be anxious to increase rates quickly or very much as wages are still collapsing.
We’re Good Now What’s Next?
The Fed is looking at the unemployment rate dropping below 6%. It has a price stability mandate as an unemployment rate that is too low generates inflationary problems. The Fed doesn’t seem too worried as their forward guidance dictates tightening in 6-12 months which seems reasonable. While the Fed is not behind a curve, it will have to bring short term interest rates up from zero. Zero is not normal, so they need to get off it, but not necessarily quickly or very far.
Rates for the 10 year have remained below 3 for the year to the surprise of many. The bond market has embraced the proposition that when the Fed tightens, it will stop near 2% and not 4% which was the old normal equilibrium for the federal funds rate. With this ricing in, rates should be at 3 for the 10 year. We are currently at 2.7 which is why we see the recent increase. Looking from this perspective, the reaction in the bond market has been normal. The “new neutral thesis” is being embraced in the marketplace.
Stocks or Bonds?
I believe stocks will outperform bonds in the next 5 years provided there is no recession. Stocks are fairly valued for where the Fed plans to go; in fact, they can move higher with continued non-recessionary type of growth over the next 5 years. Human nature is to wait and buy high, but the marketplace is fairly valued now. Get into it before it gets overinflated.
Bondholders should expect nothing more than their coupon over the next 5. I don’t see big capital gains in the bond market on the horizon. Fixed income investors should switch from duration or interest rate risk to spread risk looking to acquire income. Instead of being long on treasuries, try shorter, dated spread products such as corporates and mortgages. Bondholders have to be realistic as we are at generational lows on interest rates.
Casual Friday Everyday?
Sneakers are being worn at work all day long in the office now. Some people believe if you are more comfortable, you will be more productive. For example, in Silicon valley, employees dress casually with the idea that comfort will make people work longer. On the other hand, more traditional thinking school is that shoes and clothes make attitude. No matter the school of thought you subscribe to, studies show what you wear does effect your productivity.
51% of men think it’s ok compared to wear sneakers to work as compared to 40% of women. 48% of 18-24 year olds think it’s ok compared to 33% of those over 65. 72% of all people cite comfort as the reason for wearing sneakers at work.
This is primarily being driven by men for we don’t have that many ways to make fashion statements. Nike, Foot Locker and Skechers sales are way up as men are wearing colorful sneakers to work to say “look at me” with the added benefit of comfort.
Undergraduate and Graduate Stafford Loans as well as Direct Plus Loans rose to 4.66%, 6.21% and 7.21% respectively on July 1st. This is effective for loans issued June 3rd through 5th 2015 fixed for the life of the loan. It is the equivalent of $4 more per month for every 10,000 dollars borrowed, and rates can rise to 10.5% which is the maximum rate cap.
The Obama Administration has introduced income driven repayment plans, and cap payments at 10% of income. The balance of which is forgiven after 20 years if you are current with your payments in the private sector, and 10 years for non-profit and public sectors.
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