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Chart of the Day: Student Loan Debt and What It Means to Investors Long-Term

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Which sectors and markets will drive the economy once student loans become a drag on stock buying and housing?

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An important long-term theme for the American economy is the buildup of student loan debt over the past 10 years. This chart, courtesy of FT Alphaville, says it all:



Unfortunately, we're burdening the younger generation with debt to stimulate economic growth after already maxing out the debt load that the homeowner class could handle. At this pace, student loan debt will soon be double that of outstanding credit card debt. Ten years ago, student loan debt was a blip on the screen relative to the size of the credit card debt market.

Putting aside the fact that this is a generational tragedy in the making, what are some of the long-term implications for the economy?

1. Companies and sectors that cater to the older demographics of the economy are going to have much better demand prospects than those catering to the younger demographic. Along those lines, health care will continue to be in secular ascent. In contrast, there will be fewer incremental buyers of durable goods and housing in the younger generation as they are burdened with debt.

2. On a very long-term basis, one of the drivers of stocks is young demographics, as there are more young investors willing to buy stocks from retiring older investors. I would argue that this dynamic was one of the drivers of the 1982-2000 bull market as baby boomers in greater numbers bought investments from their elders. Going forward, the student debt burden will likely act as a brake on that intergenerational demand, potentially stagnating demand for investment goods with a long horizon (like stocks or housing).

3. Emerging markets with strong demographics and low household debt loads are going to have to be the driver of global demand going forward. American consumption is likely going to be a reduced factor in global economic growth.

In short, American demand of consumer goods, particularly consumer goods appealing to the 25-50 cohort, will be naturally reduced due to a large student debt overhang. It's one more example of the pernicious effects of too much debt in an economy.

This item by Enis Taner was originally published on RiskReversal.com.

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